Facing Up To The Costs Of Long-term Care

After you decide how much to buy, you can compare various term policies, see which are the cheapest and most practical, and buy the least expensive one that fits your needs. Longtermcare insurance seems just as simple at first. Its purpose is to protect you from a very real, very scary possibility that one day you might be unable to take care of yourself. If you wind up in a nursing home or need extensive assistance at home, you will face catastrophic costs that could eat up every dollar you ever earned.

The average daily rate now for a stay in a nursing home is $183, or nearly $67,000 annually, an expense that after a few years would sink all but the very welloff. And prices will go up. If they rise a bit faster than inflation, by 2026 the daily rate could hit $486 a day, or $177,000 a year.

Insurance looks like the solution the customary mechanism for sharing a potentially devastating financial risk with thousands of other policyholders. And it can work.

Take the case of David and Kristi Schubbe of suburban Minneapolis. Starting in 2002, when she was only 61, Kristi became forgetful and had difficulty performing routine tasks such as following familiar recipes. After three years David became unable to care for her, even with a home aide. He found a nearby nursing facility that specializes in Alzheimers patients.

I knew when I saw it, this is where I want my Kristi, he says. The bill is $5,400 a month, but their longtermcare policy, which the Schubbes bought in 2001, covers the entire expense. Insurance helped make the tragedy manageable.

Says David: It took the financial element out of when to go [into a home], where to go and how to do it.

What if the Schubbes had not purchased insurance? Medicare would not have helped because it doesnt pay for long nursinghome stays. Medicaid might have paid about 43 percent of nursing home residents eventually qualify but only after David had exhausted much of the couples assets. (Transferring assets to relatives is almost impossible because the government penalizes you for having given money to others within the previous five years.)

States set strict limits on how much money the spouse not in care can retain. In Minnesota, for example, the spouse can keep half of the couples assets up to about $100,000, plus their home (with as much as $500,000 in equity).

Finally, some nursing homes will not accept Medicaid, so relying on it would have diminished the Schubbes options. Longtermcare insurance, however, has plenty of catches.

First, you may pay thousands of dollars in annual premiums, possibly for decades, even after retirement when you have a smaller income; if you stop paying, you can lose your coverage and everything you put in.

Second, you have to look far into the future and guess what kind of care you will need and how much it will cost. Most disturbing, perhaps, some insurers business practices have recently cast doubt on how much you can trust them to hold up their end of the deal.

In the past few years many policyholders have faced exorbitant rate increases sometimes 40 percent or more. And a rash of lawsuits complain that insurers are delaying or unfairly denying the claims of some of their most vulnerable policyholders.

A Chinese menu of benefits

Decent health insurance will pay for anything from a flu shot to triplebypass surgery. Longtermcare insurance offers no such blank check.

You have to define longterm care the way your contract defines it, not by the way you might actually need it, says Robert Friedland of the Georgetown University LongTerm Care Financing Project.

A policy pays a set daily rate for a nursing home stay or other care, say $100 or $150. The higher the rate you select, the higher your premium. And if the day rate increases to $250 by the time you need care and your policy specifies $100, youre on the hook for the rest.

Some policies will raise the benefit with inflation, some wont, and the formula differs from policy to policy. How long will the policy pay? For your lifetime, if you can afford such coverage, or for the number of years you select.

To qualify for coverage, you must typically be cognitively impaired or unable to perform a certain number of activities of daily living (ADLs), usually two. Some policies offer coverage only for home care; others cover nursing home stays plus adult day care or assisted living. Some policies waive premiums while youre in care; others keep charging you.

To choose a policy, buyers must sort through enough permutations and combinations each with its own price tag to do a Chinese restaurant proud.

The risk of rate hikes

The Schubbes were in good health when they bought, so they were able to get coverage for themselves for a $3,000 annual premium. Those who have health problems like diabetes, cancer or arthritis will pay higher premiums. Or in the worst case, they might not qualify at all.

Insurance sales people point out that you can lessen that risk by purchasing a policy when youre young. The premiums would likely be low, and most insurers promise that they will not hike your rates because of age or health problems. But insurers can still raise rates for other reasons and often do. They may have to pay more claims than they expected, for example.

Lester Watts, 72, and his wife Judy, 61, of Clive, Iowa bought a longtermcare policy from Equitable Life & Casualty two years ago. Their premium was $280 a month. Within the year, however, the insurer won the right from the state to raise its rates. The couples premium would rise to about $360 a month. It all smacks to me of a bait and switch, says an angry Lester Watts.

The insurer says that new policyholders like the Wattses were notified at least a year before the rate increase went into effect, giving them time to cancel. Rather than do that, however, the Wattses have decided to reduce their benefits to keep their premium level.

Prices that keep heading skyward could eventually force you to drop the policy. At that point you may lose your coverage and all the money you paid. Youll be hard put to find a cheaper policy elsewhere, since you are older now than when you first bought, and a worse insurance risk.

You are more or less married to an insurer and you cant really change, says John Rother, director of policy and strategy for AARP, the retirees lobby. (AARP also markets a long termcare policy from MetLife.)

Rate hikes may slow. Regulation is improving, and Jesse Slome of the American Association for LongTerm Care Insurance argues that insurers have learned from experience how to price policies more accurately from the start. Thats plausible. But you may not know for decades whether theyre right.