Low-Cost Ways to Pay for Long-Term Care Insurance

Long-term care insurance isn’t very popular. Insurers estimate that only about 2% of those who should consider long-term care insurance have purchased it. Some of the reasons for this are quite good. There are other, affordable ways to pay for long-term care without leaving your heirs high and dry.

One reason people avoid long-term care policies is that the premiums are fairly high and, perhaps more importantly, they could increase substantially.

Insurers generally retain the right to raise premiums as long as it is done across a whole class of policyholders and not for select individuals. An issue that hasn’t received much attention is that some companies have dramatically increased renewal premiums. In California the state considered legislating limits on premium increases, and the National Association of Insurance Commissioners is looking into model regulations on premium increases.

Another indication of rapid premium increases or that something else is wrong with the policies is the high lapse rate. A policy lapses when an insured fails to pay premiums and allows the policy to be cancelled. Unlike whole life insurance, a long-term care policy accumulates no cash value payable to the insured when the policy lapses. Instead, the insurer keeps all premiums paid, and the insured gets nothing other than past coverage. In that way, it is much like a term life insurance policy. Some analysts believe that at least some insurers count on high lapse rates to make the business profitable.

I often have advised individuals with $2 million or more in assets to consider self-insuring for possible long-term care expenses. Individuals with less than $500,000 or so of assets should count on Medicaid or other government programs, because the insurance premiums would use up too much of their current income given the relatively low probability of an extended nursing home stay. Individuals in between face the tough decision of whether to reduce their current standard of living to pay the insurance premiums or look to other sources.

In the past I’ve recommended that individuals combine several sources to finance long-term care expenses. For example:

• Use long-term care insurance to cover a portion of potential expenses. Reduce premiums by having the coverage take effect only after you have been in a nursing home for six months or longer, and limit the coverage to a maximum of two or three years. Also, ask for a daily coverage rate less than 100% of the daily rate in your area.
• Plan to use a reverse mortgage or other way of tapping home equity to pay for some of the expenses. This won’t take current cash flow from a surviving spouse or the estate. Instead, the loan will be paid when the home eventually is sold.
• Use personal assets to cover the gaps left by this coverage. This should leave the bulk of your estate intact unless you are one of the 10% or so of the population who is in a nursing home for five years or longer.

Here are a couple of other strategies that can make financing long-term care expenses more affordable for those in the middle group.

• Purchase permanent life insurance instead of long-term care insurance to cover potential nursing home expenses. Personal assets are used during your lifetime to pay for the care. But your estate or heirs are reimbursed by the life insurance.Life insurance has several advantages. Insurers have much more experience with life insurance, so unexpectedly large premium increases down the road aren’t likely. In addition, you build some cash value in the policy. You can borrow from the cash value or let the policy lapse and take the cash value. Also, life insurance is cheaper than long-term care insurance for most people. That means you can buy more benefits for the same money, or spend less money to buy the same value of coverage.
  Have the policy owned by an individual or a trust so it isn’t taxed in your estate.
• Buy the most expensive policy from among companies with high financial safety ratings. Normally I don’t recommend paying the highest price for anything, but that can be an advantage with long-term care insurance. The highest price insurer probably isn’t counting on policy lapses to make the business profitable. It also likely is pricing its policies so that future premium increases will be in line with policy claims; it isn’t low-balling prices to increase sales. You decrease the probability that future premium increases will be sharp.

If you need extended long-term health care, insurance premiums will be small compared to the benefits received. But the insurance premiums are high enough to crimp the standard of living of many retirees. Using a combination of financial tools gives you the security of knowing that any long-term care expenses would be covered without an undue burden on your current lifestyle.