Long-Term-Care Insurance: 4 Biggest Risks to Avoid

Last Updated Jun 17, 2009 2:47 PM EDT

If you're worried about the eventual cost of caring for yourself in old age, you may be tempted to buy a long-term-care insurance policy now. This coverage can pay a significant portion of the often crippling cost of a nursing home (currently $67,000 a year, on average) or for having around-the-clock caregivers in your home. But recent congressional hearings underscored a host of problems consumers can face with these policies. The coverage may be worthwhile, particularly if stroke or dementia runs in your family — but you should know the risks.

Here are the four most important dangers of long-term-care insurance — and what to do about them.

1. You could overpay.

The cost of long-term-care policies varies enormously depending on the issuer and the breadth of coverage, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. In New York, for example, someone in his late 50s would pay between $844 and $6,900 annually. A 70-year-old might pay between $2,650 and $9,900 a year.

Advice: To keep coverage affordable, ask at least two long-term-care insurance agents to suggest coverage and then compare their policies. Your state insurance department might note the average cost of policies for residents. The cost of insuring against every possible scenario can be astronomical, so prepare to self-insure some of the risk. Consider, for example, buying a policy that pays benefits for two or three years (about the length of a typical nursing-home stay) or provides a limited daily payment of, say, $100, which is roughly half the average daily cost of care. Many policies will extend coverage if you don’t use their full daily benefit, which is one reason three-year policies are almost always sufficient, says Slome. A long-term-care association study found that only 8 percent of 106,000 customers making claims exhausted the benefits of three-year policies.

2. Your premiums could soar.

Consumers are often encouraged to buy long-term-care policies in their 40s or 50s, because premiums are relatively cheap then. On average, a policy for a 50-year-old costs about $1,700 annually versus $5,700 if you buy at 70. Agents say securing coverage early locks in a low rate because insurers can’t hike premiums on individual policyholders. That’s only partly true. Companies can’t raise rates on one individual, but they can — and frequently do — hike rates on “blocks of business.” Typically, these rate increases hit as the “block” (read, policyholders) age and are more likely to file claims.

One 80-year-old woman learned in March that her monthly premium was jumping 53 percent. The next month, the premium soared another 23 percent. After having paid nearly $50,000 in premiums over the past 11 years, she agreed to reduce her promised benefits so she could afford the cost of a minimum level of coverage, said Bonnie Burns, policy specialist with California Health Advocates.

Advice: There’s no way to predict if, when, or by how much an insurer will raise rates. This much is certain: The younger you are when buying long-term-care insurance, the more likely you’ll face a rate hike sometime. If you do get hit with an unaffordable increase, your options will vary depending on state law. A staffer at your State Health Insurance Program, or SHIP, can tell you more.

3. Your claim could be denied.

Frank N. Darras, whose Ontario, Calif., law practice helps policyholders get their benefits, believes that when troubled long-term-care insurers can’t raise rates, they decline making good on coverage in hopes that the customers will be too sick to fight. “Carriers have turned their claims departments into profit centers,” he says. “They know that old people don’t fight hard and that sick old people don’t last long.”

Advice: Before buying long-term-care insurance, read the policy carefully to see what’s covered and what’s not, paying attention to hurdles you might have to clear to get benefits. If the policy covers assisted living, for example, make sure you know which local facilities provide care that qualifies for reimbursement. Also scrutinize the fine print to learn whether a relative can be reimbursed to provide your care. Many policies don’t allow it, even if your relative is a health-care professional. Consider asking a friend or family member to be your health-care advocate. While you’re healthy, share the details of your policy and your wishes about the type of long-term care you’d want if necessary. Then, if you become too sick or addled to fight, you’ll have someone in better shape fighting for you.

4. Your insurer could go belly-up.

The problem with long-term-care policies is that people often buy them decades before they imagine they’ll be used, says Martin Weiss, author of The Ultimate Depression Survival Guide. If your once-healthy insurer goes under, it’s difficult to predict what will happen to your policy.

This scenario is hardly hypothetical: Penn Treaty Network America, the Wal-Mart of long-term-care insurance, was taken over by regulators in January. Last year, Conseco spun its money-losing long-term-care business into a nonprofit trust that can’t tap Conseco’s assets to pay claims. Regulators say both firms will need to impose massive rate hikes to uphold coverage promises to their more than 200,000 policyholders.

Because long-term-care policies have been written only since the 1980s, most policies are just starting to “mature,” so there’s little history about how a failure might impact policyholders in the long run.

Advice: Weiss suggests checking the long-term-care insurer’s financial-health rating at thestreet.com. (Click on Portfolio & Tools to find Insurance and HMO Ratings.) Unlike most insurance raters who get paid by the companies they review and rate only companies agreeing to provide data, thestreet.com is independent. Its rating system is also among the easiest to understand, giving insurers grades from A to F. Of course, a company’s rating could change in the future. But you’ll increase the odds that your insurer will be around when you need it if the company is now rated A or B+, says Weiss.

  • Kathy Kristof - feature On Twitter»

    Kathy Kristof is an award-winning financial journalist and the author of Investing 101.

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