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Our system for managing long-term care risk is nothing short of a mess. In fact, it’s not accurate to call it a system at all—what we have is a poorly-functioning private insurance market, fast-rising cost of care and a general state of denial about the potential financial risks of a serious long-term care need.

Consider these data points:

  • Last year, the median annual national cost of a private room in a nursing home facility was $108,405, according to the annual Genworth Cost of Care Survey. Care costs have risen at a much faster pace than overall inflation: from 2004 to 2021, the cost of assisted living facilities rose 4.17% per year; by comparison, the Social Security cost-of-living adjustment (which reflects general inflation) rose 2.2% annually.
  • Many Americans are either in denial about long-term care risk or simply uninformed. One poll found that 49% of Americans aged 40 and older expect Medicare to pay for their long-term care needs, and 69% have done little or no planning for their own needs.
  • Traditional long-term care insurance remains in a free-fall. Roughy 50,000 policies are sold annually, down from a peak of 740,000 sold in the year 2000. And policy holdeers have faced an ongoing series of very large rate hikes as insurers struggle with pricing that seems to have been too low at the outset.

Let’s address each of these points in a bit more detail.

Cost of Care

The national cost-of-care figures can generate sticker shock. But your client’s costs will vary depending on the type of services that she needs and where she lives. The general cost of living in a particular region has an impact, along with the cost of labor. The Genworth survey reflects a great deal of regional differences, even within states. For example, in the Chicago area, the median cost of a private nursing home room in 2021 was a little over $8,000 per month—$800 more than a comparable room in downstate Illinois.

Not all long-term care is provided in nursing homes, of course. A great deal of care is provided in home settings by paid caregivers and unpaid family members and friends—and that can bring the cost down dramatically—which also is reflected in the Genworth figures. Nationally, the average cost for a home health aid last year was $5,148

Assessing the risk

We all face the risk of a large long-term care expense during retirement due to disability, poor health or cognitive decline. But the actual risk is difficult to gauge.

The Center for Retirement Research at Boston College assessed the risks by reviewing 20 years of data on actual retirees. Looking at the risk from age 65 onward, the researchers concluded that about one-fifth of retirees will need no long-term care support, and that one-quarter are likely to experience a severe need. In between these extremes, 22% will have low needs and 38% will have moderate needs.

The degree of risk varies by socioeconomic factors. Married people tend to have better household financial health and can rely on spousal support, so they are less likely to experience a severe care need than unmarried people. The researchers also found variation by the level of educational attainment: among individuals with at least some college, 22% experience no long-term care need, compared with 9% among people without a high school diploma. The severity of need also varied by the level of education, and race. Black Americans were most likely to experience a severe need.

Your client’s personal tolerance for risk is an important consideration. Wade Pfau, professor of retirement income at The American College of Financial Services, notes that this threshold can be measured “as your degree of willingness to subject your standard of living and/or legacy objectives to the risk of substantial long-term care spending shocks. Risk averse individuals are more willing to pay a premium to offset the impact of a significant long-term care shock.”

Insuring the Risk

The traditional long-term care insurance (LTCI) market continues to struggle. These policies been difficult to sell to a public that is averse to thinking about the tough realities of a long-term care need.

Meanwhile, very large rate hikes continue to plague policyholders—and that has been an additional factor hurting sales. A survey, published earlier this year by Milliman, of insurance companies selling LTCI found that:

  • A majority have sought multiple rate hikes from state regulators. The reasons include a lower-than anticipated voluntary lapse rate (31%), higher than anticipated incidence of claims (29%) and longer-than-anticipated chain continuance (20%).
  • Milliman found that the national average premium-weighted cumulative rate increases requested ranged from a minimum of 25% to a maximum of 644%.
  • The survey also shed light on decisions by policyholders to reduce  benefits to partially offset rate hikes. The average benefit reduction election rate was 10.6%. This trend may have helped policyholders avoid the worst of the rate hikes, but their policies became less valuable.

The rate hikes could soon worsen. Members of the National Association of Insurance Commissioners voted recently to adopt a new Long-Term Care Insurance Multistate Actuarial Review Framework aimed at speeding up reviews of insurer rate hike requests.

Combination life and long-term care insurance policies offer another route for risk protection. These combo/hybrid policies make a long-term care benefit available by building in a feature that accelerates the death benefit, if the insured person has a qualifying health event that triggers a benefit. These are whole life or universal life insurance policies—which means they have a savings component and can accumulate cash value.

Hybrid policies aim to address one of the big objections people voice to buying plain long-term care insurance, namely that thousands of dollars of premium payments go down the drain if a need for care never arises. But, typically, hybrid policies require a large upfront investment (at least $100,000). Some insurance companies now make it possible to purchase combo policies without making a large upfront payment—instead, payments can be spread out over a number of years.

One feature that looks attractive—at least on the surface—is that the premiums are guaranteed and cannot increase in the future. But that’s something of a mirage, because insurers control the cash value and internal costs of these policies, and they are under no obligation to pay a going rate of return.

So, your client’s premium cannot go up, but insurers can make up for any shortfalls they are experiencing by under-paying the interest rate on the policy’s cash accumulation and increasing the amount of costs charged to the policy owner. Daily benefit amounts for long-term care typically are spelled out as illustrations—and those amounts are fungible.

Other Types of Protection

Social Security: The risk of a long-term care need is one of the best arguments for delaying a Social Security claim. The higher annuity-style benefit your client earns through delay is a guaranteed, inflation-adjusted income source. In the event of an end-of-life care need, these higher benefits can be helpful in offsetting expenses.

Defined benefit pension: If your client has earned a defined benefit pension, she should hang on to it—don’t trade it in for a lump-sum buyout offer. Like Social Security, a pension annuity can help offset care costs.

Savings: Setting aside funds to meet long-term care expenses can make sense. Only the wealthiest households can truly self-insure for a major care need, such as an extended stay in a nursing home. But a savings cushion could help cover a limited amount of home-based care.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP magazine.

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