Why a 41-Year-Old Bought Long-Term Care Insurance
He knew a lot about the costs and miseries of old age, and shares it here
In 2007, at age 41, I walked into a New York Life office and purchased a long-term care insurance policy. The agent told me I was one of the youngest customers to approach her for such a need. I had my reasons.
For 17 years, I’d written personal finance stories for The Wall Street Journal, and in that time I’d interviewed untold numbers of retirees whose greatest fear was not having enough money to support the potential costs of a nursing home, assisted-living center, or in-home care later in life. They were wise to worry, because far too many others simply assumed Medicare, Medicaid or personal health insurance policies would cover long-term care needs.
I knew they were wrong. And from scads of reporting, I knew a host of disconcerting facts:
70% of those who reach 65 will need some form of long-term care, according to the U.S. Department of Health and Human Services
20% will need long-term care for at least five years, also according to Health and Human Services.
Median nursing home costs run between $7,441 and $8,365 per month, according to Genworth, a long-time care insurance provider.
Median assisted-living costs are roughly $4,000 monthly.
And in-home care costs between $16 and $27 per hour, depending on the state – meaning $128 to $216 a day for eight hours of care.
I walked into that New York Life office because of those statistics. Because I want options – and the financial means to afford them —when I’m old and infirm. Because I don’t want to be a financial burden on my children.
Talking about long-term care isn’t easy. It’s dark. It’s unnerving. It’s a bit scary. We are, after all, discussing a period in life when we’re no longer in control of our own body, or, possibly, our own mind. We’re incapable of living independent lives.
Many boomers – 56%, says Bankers Life Center for a Secure Retirement – assume Medicare will pay long-term care’s price tag. Alas, not true, and never was. Medicare covers temporary long-term care needs related to a hospital stay, such as, say, rehab. But for ongoing, daily custodial needs, Medicare is 100% not your friend. Neither are traditional health insurance plans.
And while Medicaid will get you into a nursing home, the prerequisite is draconian: You must spend yourself into indigency — not the retirement vision for many of us. Moreover, the nursing home that accepts you might not be the one you’d choose if you had the financial means.
What’s needed is a long-term care insurance policy, designed explicitly to cover the costs of daily, custodial care. So, here’s what you need to know to understand how these policies work:
What does a long-term care policy cover? The costs of care in whatever setting you choose: nursing home, assisted-living facility, adult daycare, in-home care, hospice care, Alzheimer’s care, etc. Additionally, you can pay a family member to provide care in your own home, and for respite care that caregiver might need every so often.
Your policy will pay a prescribed, daily amount you can spend on anything from care to necessary modifications to your home, such as, say, widening the bathroom door or the shower to accommodate a wheelchair, walker or whatever.
When does the policy kick in? When the policyholder can no longer perform at least two of the six “activities of daily living”: dressing, bathing, toileting, eating, continence, walking and transferring (moving independently from bed to chair). Once you begin drawing benefits, you generally no longer pay premiums.
Who needs a policy? I’ll refer back to the statistic that 70% of everyone over 65 will require some form of long-term care. You have to decide: Are you in the lucky 30%? And are you sure about that?
What does a policy cost? It’s pricey, particularly as you age. The average policy today for a 55-year-old male costs about $2,000 a year; $2,700 for a female. But that’s like saying the average car is white and costs $15,000. So many variations, and so many bells and whistles exist, that it’s hard to give an accurate cost. Either way, the younger you are, the cheaper the policy. By the time you’re in your early 60s, policies can cost 50% more, or even greater.
But know this: Once in your 60s and beyond, chances of securing a policy fall off sharply, regardless of what you’re willing to pay. Insurers simply don’t want the risk. Nearly a third of applicants 65 to 69 were denied coverage for various reasons, according to the American Association for Long Term-Care Insurance. Above 70, your odds are even longer.
Between 50 and 64, only 21% to 24% are typically denied. So, the younger you shop, the better your odds – and the lower your premium.
What do I want in a policy? Ideally, a policy will provide benefits large enough to cover typical daily costs in your area. To gauge that, Google local costs for nursing homes, assisted-living and in-home care.
Then, make sure your policy compounds those benefits annually so that — hopefully — they track the rising cost of care. You don’t want a straight-line, annual increase. For instance, daily benefits of $125 at age 55, grow to about $241 at age 85 with a simple, 3% annual growth rate, based on that initial benefit. (Mid-80s is when most policies begin to kick in.)
That same policy compounded at 3% annually offers a daily benefit of nearly $313 at age 85. That extra $72 a day means $26,000 in annual costs you don’t need to pay.
How much is a typical deductible? There isn’t one, per se. There is, however, an elimination period of between 30 days to one year. During that time, you must fund your long-term care needs before the policy kicks in. As with traditional deductibles, the longer the elimination period, the cheaper the premiums.
Who sells long-term care policies? This is, perhaps, the most important point: Stick with high-quality, top-rated insurers. In the early days of long-term care policies, oodles of insurers flooded in. But they had weak actuarial data and no experiential data on policy lapses, so they underpriced policies to pocket premium income.
Turns out, retirees refused to let these policies lapse because they dearly valued the outsized benefits. Lots of insurers were burned as the cost of providing benefits far outstripped premium income. As a result, numerous insurers dropped coverage or raised premiums so astronomically that retirees ended up priced out of their own policies.
High-quality insurers have more accurate policy-lapse data now, and are smarter at pricing policies and maintaining those rates. Today, only a small handful of insurers offer long-term care policies. Top-rated carriers include New York Life, Mass Mutual, Mutual of Omaha, Genworth, Transamerica, Northwestern Mutual and Bankers Life.
Never go with an insurer new to this coverage area.
And, finally … here’s to hoping we’re both part of the 30%.