insurance

Alternatives to long-term care insurance

Highlights
  • Those who feel lucky might ignore insurance, and use their assets to pay.
  • Annuities, once shunned as granny insurance, have garnered a second look.
  • In some situations, life insurance, alone or with an LTC policy, could work.

Feeling priced out of the long-term care insurance market these days?

You're not alone. According to figures from Genworth Financial, the sales of long-term care, or LTC, insurance plummeted 32 percent between 2005 and 2009. This is in part due to premium hikes that reflect increasing claims on existing policies and the potential impact of the rising costs of home health care and assisted living on future contracts.

"It's highly priced," says Norse Blazzard of Blazzard & Hasenauer, a Florida firm that advises insurance companies. "The problem with long-term care insurance is that anybody who can afford it doesn't need it, and anybody who needs it can't afford it."

Long-term care also struggles under the weight of two historical anomalies today: the aging baby boomer population and rock-bottom interest rates. For insurers, that translates into more potential claims and meager investment returns with which to pay them.

"Some companies like MetLife and others have gotten out of the (LTC) business because they just couldn't price it properly," says Blazzard, who serves on the MetLife board. "They were losing their shirts."

All of which is forcing many Americans to consider plan B.

"What people need to do is get away from saying, 'I'm going to buy something that's going to take care of 100 percent of my need' and instead buy something that takes care of a large percentage of their need," says Dan Prescott of Prescott Pailet Benefits of Dallas.

Here's a look at several options available to address the financial risk that long-term care presents to you and your loved ones.

Self-insure

One option is to ignore long-term care risk entirely and simply depend on your own assets to meet the financial need, when and if it should arise. As movie character Dirty Harry might say, "Do I feel lucky?"

Pros: If you never need LTC, you've saved that money to live on or include in your estate. In addition, you never have to worry about passing a medical exam for an LTC policy.

Cons: It you do need LTC down the road, depending on your resources, it could quickly drain your estate. According to Genworth, the average daily cost of a private room in an assisted living facility is $206 per day, or $75,190 annually.

Annuity hybrids

Annuities, once shunned as poor-performing "granny insurance," have garnered a second look these days by offering a long-term care rider. Thanks to Internal Revenue Service changes, money invested in a deferred annuity with an LTC rider can be used tax-free to pay for long-term care as defined under the contract.

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Pros: Medical underwriting is less stringent than LTC, you have greater freedom in how you use the LTC benefits, and if you don't need LTC, you can redeem the accumulated value of the annuity. Upon your passing, your heirs will collect on the annuity, less withdrawals for LTC.

Cons: Annuities require an upfront premium of $50,000 or more. The money is locked up for five to 10 years, with steep penalties for withdrawals. Investment returns are typically minimal.

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