Tactics to make long-term-care coverage affordable

Tactics to make long-term-care coverage affordable

By Kimberly Lankford, Kiplinger’s Personal Finance

No matter how carefully you plan for retirement, if you don’t have long-term-care insurance, a catastrophic illness could wipe out your savings. The average private room in a nursing home costs $250 per day — or $91,250 per year — according to Genworth’s 2015 Cost of Care study. The median cost of assisted living is now $43,200 a year, and the cost of hiring a home-care worker is $20 per hour, or more than $41,000 per year for a 40-hour week. (The average length of care is about three years.) Medicare provides little coverage for long-term care, and Medicaid kicks in only after you’ve spent almost all of your money.

In the past, you could buy long-term-care insurance to cover most of the potential costs. But those fully loaded policies have become incredibly expensive. Today, a healthy 55-year-old man would pay nearly $6,870 per year for a Genworth policy that pays $200 per day for five years and increases the benefits by 5 percent compounded each year. Single women now pay about 50 percent more than single men. And premiums can spike after you buy the insurance, as they already have for many people.

Trade-offs to save money

Making a few tweaks to your coverage can save thousands of dollars in premiums and still protect a portion of your retirement savings. “I try to strike a balance,” says Sam McPherson, a certified financial planner in Brooklyn, N.Y. McPherson looks at the average cost of care in his clients’ area at www.genworth.com/costofcare, then gets price quotes for a policy that would cover a portion of the costs. “If the average daily cost of a home health aide is $113 in your area and the cost of a private room in a nursing home is $195 a day, think of covering $150 per day,” he says.

The same 55-year-old man would pay only $1,534 per year for a Genworth policy that covers $150 a day for three years with a 3 percent compound inflation adjustment. That less-expensive Genworth policy would provide up to $164,250 in coverage (in today’s dollars) when you multiply the daily benefit by the benefit period. But some trade-offs are a better deal than others.

Changing the inflation adjustment delivers the biggest savings. You need to have some inflation protection, especially if you buy coverage in your fifties or sixties and may not need care for 20 years or more. Nursing home rates have increased by 4 percent annually over the past five years; assisted living and home care costs have risen 2 percent a year or less.

But insurers have jacked up premiums for 5 percent inflation protection because their own investments are earning low interest rates. Our 55-year-old man would pay $2,666 more per year, or $4,200, if he chose the 5 percent inflation adjustment instead of 3 percent. “That cost differential is too drastic for most people,” says Brian Gordon, president of MAGA Ltd., a long-term-care specialist in Riverwoods, Ill.

Shortening the benefit period saves money but probably wouldn’t provide enough coverage for a degenerative condition, such as Alzheimer’s. Couples can hedge their bets by buying a shared-benefit policy. Instead of, say, a three-year benefit period each, they’d have a pool of six years to use between them. Adding this benefit costs an additional 15 percent to 22 percent.

Extending the waiting period can also lower the premium, although you’ll have to pay the full cost of care before your insurance covers anything. Policies with a 90-day waiting period tend to offer a good balance, but look for a “calendar day” waiting period. That starts the clock ticking as soon as you qualify for care, either because you need help with two activities of daily living or have cognitive impairment.

A “service day” waiting period has the same benefit trigger but counts only the days you receive care (the average person receives home care 3.5 days per week, according to the American Association for Long-Term Care Insurance (AALTCI). Some insurers, such as Genworth, charge about 15 percent extra for a policy with no waiting period for home care.

Find the best deal

Annual premiums are lower when you’re younger, although you’ll pay them longer. “To me, the sweet spot for buying long-term-care insurance is in your late fifties and early sixties,” says McPherson.

But it becomes more difficult to qualify for coverage as you get older. In 2014, some 21 percent of people in their fifties who applied for coverage were denied; 27 percent of those in their sixties and 45 percent in their seventies were turned down, says the AALTCI.

Most insurers now perform medical exams, which may include cognitive assessments for applicants who are older than 60, says John Ryan, a long-term-care specialist with Ryan Insurance Strategy Consultants, in Greenwood Village, Colo. Some companies may charge more if you have a family history of early-onset Alzheimer’s or heart issues, adds Gordon.

It helps to work with an agent who deals with several insurers and knows which ones have the best rates. Gordon often works with Mutual of Omaha, MassMutual, Genworth, John Hancock and Transamerica. Before applying, he asks the insurer if it will cover the person’s condition. You can find a long-term-care specialist at www.aaltci.org. A few insurers, such as New York Life and Northwestern Mutual, sell only through their agents.

Along with the coverage trade-offs, you’ll need a plan to tap your income and savings if you have to pay for some care out of pocket. Scott Sadar, a certified financial planner in Portland, Ore., says his clients identify which investments they plan to sell if they need money to pay for long-term care, and they often use products such as deferred-income annuities to provide additional income when they are likely to need care (see Make Your Money Last a Lifetime). Another option is to add a chronic-care rider to a permanent life insurance policy, which boosts premiums by about 10 percent but lets you tap your death benefit early if you need long-term care.

Tax-smart ways to pay the premiums

Several tax breaks for long-term-care premiums can help you stretch your dollars. If you have a “tax qualified” long-term-care policy (most policies sold today are), you can withdraw money tax-free from a health savings account to pay premiums for yourself and your spouse. The amount is based on age. If you’re 40 or younger in 2015, you can each withdraw up to $380 tax-free for long-term-care premiums; $710 if you’re 41 to 50; $1,430 if you’re 51 to 60; $3,800 if you’re 61 to 70; and $4,750 if you’re 71 or older.

If you don’t use HSA money for long-term-care premiums, you can count the same amounts outlined above toward the tax deduction for medical expenses. If you’re 65 or older, medical expenses are tax-deductible in 2015 after they exceed 7.5 percent of income (the threshold is 10 percent if you’re younger).

You can also pay long-term-care premiums with a tax-free transfer (called a 1035 exchange) from the cash value of a life insurance policy or annuity.