Genworth, a leading provider of long-term care insurance, for the last 10 years has published a very informative cost of care survey, and a they released their 2013 report last week. The report breaks down cost by state and within the state by location, so it’s a useful for comparing LTC costs if considering a retirement location. The executive summary shows LTC costs remain relatively stable for home health care, in the 1% range for 5 year compound annual growth, but for facility care: assisted living, nursing home, 5 year costs increased well over 4%. The average cost of a private nursing home room is $83,930 a year. The lower cost increase trajectory of home health care, currently averaging $17 to $18 an hour, is better news overall since 70% of Genworth’s first time claimants choose home health care.
Though costs for long-term care followed a fairly predicable upward pattern, traditional LTC insurance was roiled by market forces. Major headwinds exist. Prudential exited market for covering individuals. Other carriers increased premiums significantly on existing policy holders and made a series of revisions to current products with stricter underwriting.
Price and product restructuring in 2013 offers some hope to stabilize traditional LTC insurance going forward, but inherent flaws to that kind of insurance exist. The most fundamental: policy premiums are subject to rate increases. I became licensed for to sell LTC insurance in 2003 in an era when it was a still selling point that the major carriers had never had a rate increase on existing customers. Significant rate increases have now occurred, so the obvious conclusion is that the premium instability undermines the trustworthiness of that coverage for retirement planning.
Alternatives
Life insurance, hybrid benefit plans, are a viable alternative to conventional LTC insurance. Many life insurance products offer chronic care benefit riders that accelerates a portion of the death benefit out of the policy if the individual qualifies as needing assistance in 2 out of 6 activities of daily living or for cognitive impairment. Some flaws to traditional LTC insurance are not contained in many plan options: guaranteed level premiums, indemnity benefits i.e. payment in cash, higher disbursement levels. Other plan riders, depending on the product or coverage structure, are not as advantageous: fixed benefit, a capped monthly benefit cap, uncertain fees and charges to accelerate the benefit, reimbursement type benefits. Cost of the chronic care rider is either up front with the premium or back ended at time of election. Despite some inherent limitations to chronic care riders, one main advantage is that one way or the other either the coverage delivers a benefit, either as a death benefit or living benefit, unlike traditional LTC insurance which may never be required.
For couples one option is to establish life insurance policies on each other with the death benefit as a contingent asset for LTC for the surviving spouse. If used in conjunction with a life policy with chronic care benefit the policies would serve a dual purpose. Since woman tend to live longer and require more often LTC, coverage on the husband could likely help in that direction.
Annuities offer another alternative. Some annuities have long term care riders, or set up an annuity to commence a payout at a given age.
Traditional LTC insurance
Every situation is different, and it never hurts to compare, so if considering a traditional LTC insurance plan with lower premiums, look to what is called a short and fat structuring of a plan. Short meaning number of benefit years, as in 2 or 3 years. Fat meaning a benefit amount to cover major care under a worst case scenario. Since the average private nursing home is nearly $84,000 annually structure the monthly benefit, not as a daily benefit to avoid a daily cap, to be $7,000 a month. Since costs for private care is experiencing 4% to 5% compound annual growth, opt for inflation protection at 4% or 5%. Inflation protection has been an inherent strength to traditional LTC insurance, but higher levels like 5% compound have been targeted for higher premiums and higher policy rate increases, so starting with a higher base monthly benefit with a 3% inflation protection should be considered.
How much is enough?
One basic concept to long-term care insurance is to establish a pool of money to cover its potential cost. It now costs, on average nationally and rounding off, $84,000 a year for private nursing home care, and the average stay in a nursing home is 2.5 years. That comes to $210,000. Is that enough? To cover health care or assisted living would probably be less. The average life expectancy for a person with dementia is 4.5 years. That comes to $378,000 currently for private nursing care.