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Long-term-care Insurance Is Crucial, but Often Expensive

LongTermInsuranceHourglassPatricia Grenier doesn’t miss an opportunity to talk about long-term care — and the insurance products available to pay for it.

“I talk about it with every client who crosses my desk,” said Grenier, general partner with BRP/Grenier Financial Services in Springfield. “I discuss how they’re going to take care of themselves, what their plan is for long-term care, and we discuss all the options; they can self-insure. They could give away all their money and live off the state, but who wants to be poor? That’s not the goal. They could move in with family — usually their kids — but nobody wants that.”

As Baby Boomers surge into their retirement years and Americans are living longer, on average, than ever before, the rising cost of long-term care — which may include everything from home care to assisted living to skilled nursing care — is not a matter to be taken lightly. The cost projections, for all tiers of care, are daunting.

In fact, according to Genworth Financial, the largest seller of long-term care policies with roughly 35% of the market, the median annual costs of care in Massachusetts are:

• $126,290 for nursing-home care in a semi-private room, or $134,320 for a private room, with costs rising about 4% per year;

• $62,964 for a one-bedroom assisted-living unit, rising about 4% per year;

• $57,200 for a home health aide, or $52,625 for homemaker services, costs expected to remain fairly steady; and

• $16,900 for adult day healthcare services, with costs rising about 3% per year.

In other words, the costs rise steeply with the level of care required, and these are numbers that most Americans are simply unable to handle on their own.

“Unfortunately, very few people are prepared to deal with this risk, as less than 8% of people have long-term-care insurance, and only 10% of people in the U.S. have a long-term care plan in place,” notes Jamie Hopkins, who writes about retirement-income planning for Forbes. “This lack of planning is extremely troubling because long-term care is a very real and expensive risk, as nearly 70% of people will need long-term care at some point.”

Frank Carrazza, director of Financial Planning at St. Germain Investment Management in Springfield, said there are many reasons why people put off buying long-term-care insurance.

“We all know that, once we get older, it would be nice to protect ourselves so we don’t have to lose our assets,” Carrazza said. “The ideal time to buy, for most people, is probably between 50 and 55, when premiums are reasonable. But at ages 50 to 55, they’re not thinking about retirement that much, and they’re still accumulating for retirement. When people get to age 65, 66, 70, they may re-evaluate.”

By then, however, premiums are more expensive.

“Let’s say you want to buy a long-term-care policy in the area of $250 to $300 a day. It’s very expensive. On average, a 65-year-old couple, if they’re in good health and non-smokers, might pay $6,000 to $8,000 a year, depending on the benefits. A lot of people can’t fit that into their budget. Or, people with substantial assets, who can afford it, might not pay for it, but figure they can use their own resources later on.”

Tough Decisions

Dan Caplinger, director of Investment Planning for the Motley Fool, says the idea of decades of ‘sunk costs,’ never to be recovered, worries people, especially when rates go up.

“Insurance agents typically advise people to obtain long-term-care insurance as early as possible to reduce costs, as premiums are much lower for younger policyholders who are less likely to need benefits in the immediate future,” he writes. “What that means, though, is that those who’ve held onto their policies a long time have already paid tens or even hundreds of thousands of dollars in policy premiums without having gotten a dime in benefits to show for it.”

And when faced with possibly hundreds of dollars in extra premium payments each month, many people — especially those on a fixed income — find themselves trapped by the spectre of the rate increase. “That will prove an impossible task, and they will have to accept lower benefits or even give up their policies entirely — thereby having essentially wasted all the money they’ve spent on premiums for years.”

Howard Krooks, an elder-law specialist in Florida, told the New York Times that he advises clients faced with an increase of 20% or less to “bite the bullet” and pay it, even if they think it was unfair. If the increase is much higher, they may consider reducing their benefits — for instance, by accepting a daily benefit amount of $250 a day rather than $350 — to keep the premium down.

Pat Grenier

Pat Grenier says she makes a point of talking to virtually every client about long-term-care insurance.

And those rate increases keep coming. Genworth began seeking increases on its existing policies in 2012, with the goal of raising between $250 million to $300 million in additional premiums by 2017. Meanwhile, Grenier said, John Hancock is raising rates by up to 50%. “That’s amazing. And I think Genworth is going to gender underwriting, where before it was unisex. Now women are more expensive — because, statistically, women still live longer than men.”

A new trend, Carrazza said, is an option for a large lump-sum payment — say $50,000 — which is refundable if it’s never used, as opposed to a monthly premium, which customers typically don’t get back.

Whatever the product, he added, the market is becoming tougher for customers, with higher rates, lower benefits, and fewer options available than there were years ago.

“Fewer companies are offering the product, and those fewer companies are now underwriting the product,” he explained.

“What that means is, if someone wants to apply, instead of just filling out an application and having a telephone interview, in most cases, people are required to complete a paramedical exam — the same type of exam taken for a life-insurance policy. Insurance companies are losing money with the product, so they’re raising premiums and underwriting the product to improve their claims experience. And, from a customer point of view, that makes it harder to get the product.”

Insurance companies say the changes are necessary. Caplinger noted that they paid out almost $7.5 billion in claims for long-term-care benefits in 2013 — a 13% rise from the previous year, with benefits going to 273,000 policyholders across the nation. He cited another study projecting that current benefit payouts will double by 2023 and rise to $34 billion by 2033 as more people start accessing their policy coverage.

Expensive — but Necessary

Despite the expense, long-term-care insurance remains a critical product, said Grenier, who said the ideal age to purchase it is in one’s late 50s or perhaps early 60s.

“It’s absolutely a necessity,” she told BusinessWest. “A couple could spend around $250,000 a year [on care]. That’s a lot of money. So I do talk to everyone about it.”

There are some creative options for families willing to sacrifice together, she said, noting that she and her siblings actually pay the premiums for their parents’ long-term-care insurance.

“Many times, people who are retired have a hard time making ends meet. For me, I’d rather pay a premium now on a monthly basis than come up with tens of thousands of dollars later on. I look at it as a family issue.”

Grenier joked that the decision was partly a “selfish” decision, to avoid huge out-of-pocket expenses later, but quickly got back to the idea that her family wants to make sure their parents are cared for.

“Obviously, we want them taken care of well, and that could be more expensive than just paying a monthly premium today — and, of course, I have siblings helping out,” she said, adding that, in many families, especially those scattered around the country, one child takes the lead in caring for — or financing the care of — a parent, which can cause rifts and resentment in the family.

“It’s very difficult when one lives in California, and you’re in Massachusetts. How do you handle that care?” she said. “In the old days, our elders lived with us. Now, that doesn’t happen. And the government doesn’t have the money it used to have; we are responsible for ourselves.”

Other options exist for paying for long-term care, Hopkins notes in Forbes, including reverse mortgages and income annuities.

“While self-funding, long-term-care insurance, Medicaid, and family-provided care will continue to be the primary sources of long-term-care funding for the foreseeable future, the market is changing, and more people are becoming aware of these new and alternative ways in which to pay for long-term care,” he writes. “Whatever avenue you decide to take, having a plan in place is crucial.”

Grenier agreed. “It’s a rising trend. It’s a need for more people, I think more people are aware of it, and more people are buying it.”

Even as rates continue to rise.

“Long-term care is going to get more expensive,” Carrazza said. “That’s the really sad part about it. It’s difficult.”

Joseph Bednar can be reached at [email protected]

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