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The ever-rising cost of long-term care insurance

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Long-term care insurance seemed like such a great idea. Buy a policy when you're in your 50s or 60s, while you're still relatively healthy, pay your monthly premiums and in return you'll have help managing the astronomical costs of a nursing home, assisted-living facility or personal aide when the time comes.

This insurance was not only supposed to help you afford quality care, but it also was supposed to help protect your nest egg and legacy. You wouldn't have to spend all your hard-earned retirement savings on getting old.

But long-term care insurance hasn't exactly worked out that way. The past few years have brought sky-high premium increases for most policyholders. In some cases, premium prices have doubled in the past two years. The latest bad news came last week when Mass Mutual, an insurance company that has so far avoided big LTC premium increases, announced that it would seek approval from regulators to charge an average of 77 percent more on many of its established long-term care policies. 

Price hikes like this have forced consumers to make some unpleasant choices. Some seniors struggle to pay increasingly unaffordable premiums, digging into savings and cutting living expenses to hang onto the coverage they fear they may need soon.

Others try to keep premiums affordable by cutting back on the amount of benefits their insurance will cover, leaving themselves exposed to the risk of unaffordable out-of-pocket costs. (The eventuality these policies were supposed to prevent.)

Still others are abandoning policies for which they may have already paid tens of thousands of dollars in premiums. Meanwhile, the high cost of long-term care insurance and the reduced amount of coverage is dissuading new consumers from buying policies, even as the cost of long-term care continues to rise.

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More than 7 million Americans own long-term care insurance policies. As recently as 2002, about the peak of their sales, a thousand or so insurers offered the product, Ray Farmer, director of South Carolina's Department of Insurance explained. "Now there are probably a dozen left," he said.  

What went wrong?

Almost from the beginning it was clear that insurers may have underestimated the amount they would pay in claims for runaway nursing home costs and, because of longer lifespans, the length of time they would have to pay them.  At the same time, back in the 1980s and 1990s when the industry was growing, insurers worked from the premise that aging people would want to stay in their homes as long as possible, completely underestimating the popularity -- and expense -- of assisted-living facilities. Those claims added up quickly.

What's more, insurers drastically overestimated how many consumers would cancel their policies, thus reducing the amount of claims to be paid. But consumers doggedly clung to their coverage, not wanting to give up protection against such unmanageable expenses later in life.  

Put this against the backdrop of a near-decade of record low interest rates that significantly affected insurers' underlying investments and you have a perfect storm for premium increases.

Still, consumers do have some limited steps to help offset the high cost of long-term care insurance. Here's advice from Farmer and long-term care experts.

Balance coverage cutbacks with your expected needs

The easiest way to negate rising premiums is to cut back on coverage, including adding a starting period before benefits kick in, shortening the length of coverage from, say, five years to three or eliminating some types of coverage such as home health care.  

It's important to balance these cuts with a serious look at your needs and what you can afford to pay out of savings. For example, many policies are implementing a 90-day waiting period until benefits kick in. If you're entering a nursing home, where the average price for a private room is about $7,700 a month, out-of-pocket costs for the first three months will add up fast. 

Also, what happens if coverage runs out? The average stay in a nursing home is about two years, but many people with dementia or Alzheimer's end up staying far longer than that.  

People with older long-term-care policies written 10 to 20 years ago will likely find they have much more generous coverage than policies written today. That may mean your policy has benefits you may decide you can safely forego in exchange for more affordable premiums. Or you may find the generous coverage is worth stretching to pay higher premiums. 

"I tell people to do the research in their area, find out what assisted living, nursing home and home health care costs and make a realistic estimate of what they can pay and what they need covered," Farmer advised.

Consider hybrid plans and other alternatives

Many insurers are adding long-term care benefits to their permanent life insurance policies that include investment that build up over time. A holder of such a hybrid policy may withdraw funds from the policy for long-term care needs until funds run out, at which time the insurance company would cover care. If a policyholder never needs long-term care, the death benefit would still be paid. 

Hybrid policies can also be pricey, but some consumers like the idea that premiums paid would also go toward a payout to their heirs if long-term care turns out to be unneeded.

Also, check any permanent life insurance policy you may own for a "chronic illness rider." These riders often kick in for the same reasons that you would make a long-term care claim, so you may find some coverage there. 

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