Will You Save Money By Buying the Government's New Long-Term Care Insurance?

Last Updated May 27, 2010 2:52 PM EDT

We're all supposed to be responsible for ourselves, right? Don't ask the government for help.

When it comes to preparing for the costs of long-term care, however, that ideology isn't working very well. People who can afford long-term care (LTC) insurance often skip it. They plan on letting the welfare program called Medicaid pick up their future costs. As Boomers age, that's going to break the bank.

So the government is preparing to make you an offer. The health reform law includes a national, government-sponsored LTC insurance plan called CLASS -- the Community Living Assistance Services and Supports act. It encourages you to put your money where your mouth is and provide for some of your expenses yourself.

CLASS is designed to be a workplace plan. Employers are expected to offer it to their employees. Your company might even sign you up for a policy automatically, when you're first hired, with the right to opt out if you don't want it. There's no medical exam. Your premium depends only on your age and can be deducted from your paycheck. The self-employed and workers whose companies don't offer CLASS will sign up in some other way.

Already, many employers offer their workers private-company LTC insurance, on payroll deduction plans and, often, with no health exam. There's no automatic sign-up, so younger, healthier employees rarely buy. If those same younger employees are swept into the new government plan, they might opt out. But, inertia being what it is, many might not bother. They'd be covered without ever thinking about it -- a good thing for their future finances as well as for the Medicaid budget.

In theory, the CLASS plan should be cheaper than private LTC insurance in the workplace. There are no marketing and sales expenses and a large number of healthy workers should be included in the insurance pool. The law sets costs at 3 percent of premiums, compared with nearly 15 percent and higher for private plans.

On the other hand, CLASS will charge only a nominal premium ($5 a month) to employed students and low-income workers, which means that everyone else will have to pick up some extra costs. By law, the program has to pay for itself. Taxpayer subsidies aren't allowed.

Furthermore, the government plan can invest its money only in government bonds. Private insurance companies can buy higher yielding securities such as corporate bonds and derivatives. Those extra earnings help hold down the premiums they charge.

If you're in your 50s or 60s and have assets to protect, don't wait for CLASS. Buy coverage now, while you can pass the medical exam that private companies require. But be warned: Prices are up by 10 to 30 percent, depending on the product and the company.

If you're younger, wait to see what the CLASS plan looks like and whether your employer signs up. It might be a better deal than private LTC. Private companies might design coverage to wrap around CLASS.

"The big question is what the coverage will cost," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, and we won't find that that out until the plan takes firmer shape. It's possible that some private plans will be cheaper than CLASS for healthy applicants who apply with a spouse and get the spousal discount. They could skim the cream of the couples' applicant pool. For single applicants and older workers, however, especially those with health problems, CLASS will probably win.

The regulations for CLASS plans won't be published until 2012, with coverage not likely to start until 2013. So there's no point trying to parse the policies now. Premiums are supposed to remain level for life. But -- as with private LTC insurance -- they can rise to keep the plan solvent. Benefits increase with the inflation rate. You'll have to pay premiums for five years, and work for at least three of those years, before qualifying for care.

When you claim a benefit, its size will depend on the seriousness of your case. Congress set the lowest payment at $50 a day, and estimated future costs based on an average of $75 a day. Nursing homes currently cost $150 to $300 a day. So CLASS represents only a down payment on the total expense, but probably more than you've set aside already.

Technical problems loom for CLASS. There could be lots of opt-outs, especially by workers age 20 to 40 who misunderstood the nature and price of the policy. Companies will need a robust employee education plan, to encourage workers to stick. Firms with high employee turnover aren't likely to join at all.

If the plan turns out to be a good deal, what will you do? Buy LTC insurance? Or punt and let the taxpayer (Medicaid) cover your bills? This country is all for personal responsibility. We're going to see if you mean it.

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