It’s a subject most of us would rather avoid. What if one day you’re no longer able to safely move around, feed yourself, bath yourself, or complete other activities of daily living? What if you find you need care just to live your life?

Those who reach a point where they can no longer perform one or more of these basic, daily functions will need help. Health insurance does not cover this kind of care. So, who will provide it? Typically, in our society a spouse, partner, child or other family member will help. But what if this is not possible, because there is no one nearby able or willing to provide care? When this occurs, someone outside the family will need to be hired to do so. This care may be provided in your home or it may be provided in a care facility.

Genworth Financial reports that in 2017 the median annual cost of a home health aide was $49,192, and the median cost of a private room in a nursing home was $97,455. By 2027, the median annual cost of a home health aide is expected to be $66,110, while the median cost of a private room in a nursing home will be $130,971 per year. So, this care is expensive.

At Springwater, we encourage people to consider different approaches to addressing this risk. One option is “self-insurance”, which involves earmarking savings for the specific purpose of paying for care. The other option is long-term care insurance, and involves paying premiums to an insurance company that assumes the risk for you. A hybrid approach would be to address the risk by both setting aside your own funds for care and also purchasing some long-term care insurance.

Self-insurance may be an option for some. But what if you are among those who need several years of care? The total cost could easily be several hundred thousand dollars. Will your long-term financial security be jeopardized, if you need to pay for several years of care?

The other option is insurance. In the US, we have both public and private insurance.

Medicaid is our government-sponsored public insurance option. While the government provides long-term care through Medicaid, relatively few qualify for it. The rules require you to spend down your own assets, with the exception of your home and $2,000 (in savings and investments). It is also very difficult to qualify for Medicaid by strategically “spending down” assets by giving them away to family. There is a look-back period (60 months in Oregon and 30 months in California) during which assets cannot be given way to qualify for Medicaid. Don’t count on qualifying for Medicaid coverage.

The private insurance industry has been offering long-term care insurance for over thirty years. These policies have distinct features: the benefit amount (dollars per day), the waiting or elimination period (the period before benefits start to be paid), the benefit period (how long the benefit amount will be paid) and perhaps an inflation-indexing component (to increase the benefit amount as the cost of care increases). These policy features, and your age and health, determine the premium you’ll pay.

When this insurance was first introduced, the industry badly mis-priced it. Insurance companies, with few exceptions, underestimated the extent to which people would actually file claims. They underestimated the cost of care, and the length of time people would need care. They also overestimated how many people would allow their policies to lapse. As a result, many insurance companies have incurred large losses on their long-term care insurance policies. These losses have forced many insurance companies out of the market. Other insurance companies have dramatically increased premiums and/or reduced the benefits on their existing long-term care insurance policies.

Because of the dramatic increase in long-term care insurance premiums, fewer people are buying the product. Sales of traditional long-term care policies are down 60% since 2012, according to Morningstar. The insurance industry has responded by rolling out new products. The most popular product combines a universal life insurance policy with long-term care insurance. Another combines an annuity and long-term care insurance. These hybrid products come in various forms. Sales of these hybrid products are now greater than those of traditional long-term care insurance.

New York Life announced last week that the company would introduce a new approach to long-term care insurance. The Wall Street Journal reported that New York Life’s policy would not have a waiting/elimination period, would include a one-time deductible (the amount the insured would have to pay before benefits commence) and would provide as much as $500,000 in benefits. New York Life has not yet announced pricing for this new product, but has said it will be priced attractively.

Given that more than half of all Americans over the age of 65 will need some form of long-term care at some point in their lives (source: AARP), we should all be considering this risk and thinking about how to manage it.

Long-term care insurance will be one of the topics at Springwater’s client event on Tuesday, September 18. We invite you to come listen to an expert talk about what’s happening in the long-term care insurance marketplace. And feel free to bring a friend.

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