Preparing for Long-Term Care: Any Good Options?

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A huge wave of baby boomers may need long-term care in their golden years — and yet fewer than half have taken steps to prepare for it. That's the sobering conclusion of a recently released industry study that shows two-thirds of Americans believe it's important to plan for long-term care, but only 44% have taken steps to protect themselves — and most of those steps only involve boosting their savings accounts. But while it's clear that not enough people are thinking about preparing for their long-term-care needs, it's not at all clear what, if any, the best solutions are.

"People recognize that long-term care is a need, but they attribute that need to somebody else," says Mike Hamilton, an assistant vice president at Lincoln Financial Group, which conducted the survey and sells hybrid policies that combine life insurance and long-term care benefits in a single policy.

Even if they aren't among the many Americans in denial or who believe their children will look after them, many people underestimate the need and cost of long-term care, and many wrongly believe that savings and government programs, such as Medicare and Medicaid, will easily cover the tab if needed.

"They're in for an enormous rude awakening," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

Most Americans, after all, don't have nearly enough in general savings. The average cost of a nursing home ranges from $85,000 to $120,000 a year, while hiring an aide to spend six hours a day on average in the home starts around $40,000 a year, says Steve Schoonveld, a member of the American Academy of Actuaries. Medicare, meanwhile, only covers up to 100 days of long-term care and often involves co-payments. Medicaid will cover long-term nursing-home care but only after the person has drained his or her savings account.

Long-term-care insurance is an option but one that's fraught with risks and regrets for those who don't do their homework, don't check the fine print or don't choose a reputable company. There have been horror stories of people paying premiums on long-term-care insurance policies for years, only to find the benefits won't cover their needs 20 or 30 years down the road when health care and long-term-care costs are significantly higher.

"A policy benefit worth $50 or $100 in coverage a day today — even if they have inflation protection — may not come near meeting their needs by the time they need coverage," says Judy Feder, a senior fellow at the Center for American Progress and a professor of public policy at Georgetown.

In other cases, some insurers have been slapping hefty increases on premiums, making them no longer affordable for people who had been paying premiums on their policies for years. For example, a number of firms, like John Hancock, a unit of Manulife Financial, recently announced plans to raise rates on existing policies as much as 40% after underestimating both health care costs and the number of people who would hang onto their policies through retirement. "We've found that more people used their policies than had been anticipated and the increase is needed to meet the needs of our policyholders in the long term," says Marianne Harrison, president of long-term-care insurance at John Hancock. "The question is, How much confidence do you have in what you're buying that the rates won't go way up or the company won't sell its book of business?" says Jim Firman, CEO of the National Council on Aging. New York Life and Northwestern Mutual are among the companies that have not raised rates, at least not yet, he says.

And while some raised rates, others, such as Allianz SE, Minnesota Life Insurance Co. and MetLife, have either suspended or scrapped sales of future long-term-care policies altogether. The huge premium increases left many cash-strapped policyholders scrambling for ways to make the payments or risk losing the policies they had already spent years paying into.

"You need an insurance company that's really stable, solvent, has a smart reserves policy and is being careful about its hedging," says Jacob Hacker, a political-science professor at Yale University and author of The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States and Health at Risk: America's Ailing Health System — and How to Heal It.

Consumers also need to pay attention to the fine print when signing up, says Jennifer Jaff, executive director of Advocacy for Patients with Chronic Illness, which handles many of the appeals that policyholders file against insurers who deny claims. There are myriad options available — ranging from daily benefit limits to length of coverage — that must be carefully screened and selected before signing on to prevent unexpected surprises down the road.

Jaff says some people wrongly believe their policy will kick in whenever they feel ready to move to an assisted-living facility or nursing home, and then find their request is denied. Most policies require the person either have significant cognitive problems, like Alzheimer's, or be unable to do at least two everyday-living activities, such as bathing, dressing, using the toilet, eating or getting in and out of bed. "If someone just has problems remembering to take their medication, that's not covered," Jaff says.

The federal government has recognized these issues and jumped into the fray to offer a potential solution by passing the late Senator Ted Kennedy's Community Living Assistance Services and Support Act, often dubbed the CLASS Act, as part of the health care reform legislation, which takes effect this year. The act will create the first publicly funded long-term-care insurance program.

The CLASS Act will be a voluntary program that will allow people to pay low monthly premiums, likely between $100 and $200 a month, to qualify for cash benefits of at least $50 a day to be spent on long-term-care services. The Secretary of Health and Human Services has until October 2012 to finalize terms and details of the plan, after which Americans can sign up for the program.

Georgetown's Feder calls the government program a "good first step," as people's premium rates will be locked in and they cannot be turned down for health reasons. However, the program is voluntary, and both Feder and Yale's Hacker say its success will depend on widespread participation in order to provide good benefits at low premium rates. Although employers that sign up for the plan will offer an automatic payroll deduction, employees are free to opt out of it. "There are uncertainties" since it's voluntary, says Feder, who speculates people may still need private insurance as a supplement to meet all of their long-term-care needs.

Most observers agree it's better to look at the options sooner rather than later. A long-term-care policy can cost twice as much or not be available at all for health reasons when purchased in your late 60s rather than your 40s or 50s, says Martin Corry, director of health policy at Buchanan Ingersoll & Rooney, who recommends people start looking in their 40s. So far, few have heeded that advice. Only 10% of the population between the ages of 45 and 62 have purchased long-term-care insurance policies, says Steve Nussbaum, president of Nussbaum Long-Term Care Planning & Insurance. "Clearly, there's still a critical mass of people who haven't dealt with this issue," he says.

Many are reluctant to buy it because they worry about spending money on a policy they'll never use, which Slome insists makes little sense. "Tell me any kind of insurance that you own that you hope to get your money back," he says. It all comes down to protecting assets, he says. "Very simply: Are you willing to invest 1% of your overall savings and investments each year to protect the other 99%?" he asks. "If you have half a million in investments, are you willing to invest $5,000 to protect the other $495,000?"