The costs and complications of long-term care insurance

Daniel Workman

About 70 percent of seniors over age 65 will require long-term care at some point in their lives, according to the U.S. Department of Health and Human Services. And the cost of caring for an elderly family member who needs nursing care can be financially overwhelming.

Long-term care (LTC) insurance policies can cover an array of assisted-living expenses. Eligible expenses range from caregiver help with bathing and eating to home renovations, including automated stair lifts and motion sensors for monitoring of patients.

Although LTC insurance can be a vital financial planning tool for seniors, it can be costly and complicated. Just under 5 million Americans had long-term care policies at the end of 2009, according to insurance industry research and consulting association LIMRA.

Here are some of the complications and worries America’s aging population could face when it comes to LTC insurance.

Expensive premiums

A joint study from Avalere Health and the Kaiser Family Foundation cite expensive premiums as the biggest factor in consumers deciding not to buy LTC insurance.

Premium costs accelerate after age 60. In the Avalere-Kaiser study, average yearly premium costs tripled from $1,512 for a 40-year-old to $4,515 for a 70-year-old.

Insurance companies can raise premiums for existing policyholders to even higher levels, provided that government regulators approve. After increasing LTC insurance rates between 13 percent and 18 percent in 2008, insurer John Hancock asked authorities to allow further premium hikes averaging 40 percent in 2011.

Costly premiums might explain why many LTC policyholders are more financially stable than the general population. Half earn more than $75,000 a year (compared with about a third of the general population 50 and older), while only 16 percent earn less than $35,000 annually, according to the Avalere-Kaiser study.

Inflation costs

Another cost complication is that LTC benefits often are payable many years after coverage was first purchased. Over 20 years, inflation might push average daily nursing home charges to $500 a day when the original policy only covers up to $150 a day. To make up for that difference of $350, an insured person could face $127,750 in out-of-pocket charges for a one-year stay in a nursing home.

Keep in mind, buying inflation protection for your policy increases benefits over time to compensate for the increased cost of care. But it’s unaffordable for many. Half of individual LTC policies sold in 2006 came with 5 percent compound inflation protection, according to the Avalere-Kaiser study. Yet only 44 percent of applicants earning less than $25,000 a year (those who might be least able to pay high out-of-pocket costs) bought any inflation protection at all.

Confusion about coverage

LTC policies often are far too complex for average consumers to accurately compare benefit provisions on their own. Below is a tiny sample of choices that applicants face:

• Daily policy maximums from $50 to $300.
• Maximum benefit payment periods, typically from three to five years.
• Benefit payment waiting periods, usually 90 days or more.

Consumers also must decide on the best combination of eligible charges from a range of products that competing insurance companies offer.

How and when claims are paid also can differ significantly. To fulfill benefit payment waiting periods, many insurers only count “service days,” days when the insured actually receives paid care, instead of calendar days, according to a 2006 AARP Public Policy Institute report. Other companies credit every calendar day that a claimant was qualified to receive benefits toward the waiting period, regardless of when care was delivered.

Exclusions and limitations

LTC policy definitions and other legal wordings can severely restrict claim payments.

Many LTC policies exclude benefits for home care services provided by spouses, children, other relatives or anyone who lives in the insured person’s home, according to the AARP report.

Another example is the definition for assisted living centers, which, according to the AARP report, can include a host of complex conditions — disqualify facilities with fewer than a certain number of beds, for example.

Fear of vanishing benefits

Major LTC insurance player, Penn Treaty Network America, filed for bankruptcy in October 2009. This past November, MetLife announced that it would stop selling LTC insurance policies in 2011 (although it will continue to honor policies it already has sold).

Because of this lack of stability, seniors might fear paying premiums for many years without ever collecting any benefits if the company goes out of business, exits the LTC insurance market or raises premiums to stay afloat.