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The High Cost of Long-Term Care Insurance (and What to Use Instead)

Maryalene LaPonsie

Long-term care insurance is coverage that will pay for assisted living, nursing home care or home health care in the event you are unable to care for yourself because of a chronic condition or disability.

Long-term health insurance can be a smart purchase when you consider that 70% of those turning age 65 today will need some type of long-term care, according to the U.S. Department of Health and Human Services.

However, not everyone can buy long-term care insurance. For some, the price becomes cost-prohibitive if they wait too long to make a purchase. For instance, according to the industry group American Association of Long-Term Care Insurance, a 65-year-old couple can purchase a policy for $4,800 per year that will give them base benefits of $180,000 plus 3% inflation growth. The price for that same plan more than doubles to $8,700 per year if the couple waits until age 75 to buy. And others may have health conditions that make them ineligible for coverage at any price.

Factors Pushing Insurance Rates Higher

Some policyholders have run into trouble in recent years as premiums spiked on plans sold in the 1990s and early 2000s. Long-term care insurance experts say the rate hikes seen on older policies were the result of faulty assumptions about the number of claims that would be made and how many policies would lapse. What's more, some insurers did little to no underwriting in the early years, making it possible for virtually anyone to buy coverage regardless of the probability of them filing expensive claims in the future.

It's a different story for policies sold today. Long-term care insurers have made significant changes in how they issue and price their plans. "They've fixed their pricing. They've fixed their underwriting," says Noel Evans, a long-term care insurance specialist in the District of Columbia. Now that companies have decades of claims data to base their underwriting, premiums should become less volatile in the future.

Still, if you find yourself priced out of the market or ineligible for health reasons, there are other options to pay for long-term care, ranging from reverse mortgages to Medicaid.

[Read: Alternatives to Long-Term Care Insurance]

10 Alternate Ways to Pay for Long-Term Care

Don't count on Medicare to pay for nursing home, assisted living or ongoing home health care. Medicare benefits for that type of care are typically only available after a hospitalization or injury and for a limited duration. While Medicare isn't an option, here are 10 alternatives that are:

-- Group Long-Term Care Insurance

-- Short-Term Care Insurance

-- Life/Long-Term Care Insurance

-- Health Savings Accounts

-- Long-Term Care Annuities

-- Life Plan Communities

-- Veterans Benefits

-- Home Equity

-- Pensions or Social Security

-- Medicaid

Group Long-Term Care Insurance

If you're not eligible for an individual long-term care insurance policy, you may be able to get group coverage as a voluntary benefit at work. "These policies are very affordable to employees," Evans says. Plus, some employers may help cover the cost of premiums.

Group policies also may operate under a simplified underwriting process, making them more accessible. Group long-term care insurance benefits aren't widespread yet, so employees may have to inquire with their human resources office about the possibility of adding this benefit.

Short-Term Care Insurance

Also known as recovery care, these plans are similar to long-term care insurance policies, but benefits are typically capped at one year. Not only are they less expensive, but they may also be available to older seniors or those who aren't otherwise eligible for long-term coverage.

Life/Long-Term Care Insurance

Life insurance policies that include long-term care riders are exploding in popularity right now, says Michael Gerstman, CEO of the Dallas-headquartered retirement planning firm Gerstman Financial Group, LLC. These riders often let people dip into up to half of their death benefit early in order to pay long-term care expenses. Some companies may charge for a rider within a plan's premium while others take a fee from the death benefit should the rider be utilized.

Vantis Life uses the latter option, company CEO Ray Caucci says. Policyholders with a chronic illness accelerated benefit rider don't have to pay upfront, but their beneficiaries will receive a reduced death benefit that reflects both the accelerated benefits as well as a fee for the rider. "It's a trade-off," Caucci acknowledges. However, it's one people may be willing to make since it gives them money for long-term care without locking them into a dedicated long-term care policy they may never use.

Given the popularity of using life insurance for long-term care, companies have rolled out a variety of riders and hybrid policy options. "There are a lot of different levers in a plan that can adjust the price," says Megan Birchmeier, an agent with New York Life Insurance Company in Grand Rapids, Michigan. She recommends people take a holistic look at their future needs, including their family history, the facility they'd like to use and the death benefit they would like to leave for loved ones.

[Read: What You Need to Know About Long-Term Care Insurance.]

Health Savings Accounts

For those who have an eligible high-deductible health insurance plan, a health savings account offers a way to put money aside tax-free for medical costs, such as long-term care. They are sometimes called health IRAs, and those who have long-term care insurance can pay their premiums with money from an HSA.

Long-Term Care Annuities

Long-term care annuities are a frequently overlooked option for covering home health, assisted living and nursing home care costs. These annuities are available even to those in poor health, but expect to make a hefty upfront payment, particularly if you want benefits to start immediately. Tax rules surrounding annuities can be complex and they can impact eligibility for Medicaid so consult with an experienced advisor before purchasing one.

Life Plan Communities

Previously known as continuing care communities, these arrangements have residents initially living independently. As needed, they may transition to assisted living, memory care or a nursing home operated by the community. In addition to monthly payments, Life Plan Communities require a significant upfront payment that could translate to hundreds of thousands of dollars. However, in exchange for the higher upfront cost, members are guaranteed access to care even if they should no longer be able to pay for it.

Veterans Benefits

The Department of Veterans Affairs provides those with a service-related disability access to long-term care services. Family caregivers may also be eligible for compensation through the agency's Aid and Attendance program.

To be eligible, veterans need to have a service-related disability, but Vietnam-era veterans who don't have an obvious service-related disability may still qualify if they were exposed to Agent Orange and developed a health condition later in life. Since program rules are complex, contact the Department of Veterans Affairs for assistance in understanding the eligibility criteria and navigating the application process.

Home Equity

Retirees without significant investments may still own a valuable asset: their house. Tapping into home equity through a line of credit, taking out a reverse mortgage or selling a house outright are some of the ways people can use their property to pay for long-term care.

Be aware that reverse mortgages typically require the sale of a home after a person's death, so families may want to use that option as a last resort. "I'm really against reverse mortgages for almost anything unless someone is really desperate," Gerstman says.

Pensions or Social Security

Depending on the size of your monthly payments and the amount of care you need, paying for services monthly out of a pension or Social Security benefit may be an option.

Medicaid

When all other options have been exhausted and a person's income and assets have been depleted, the government will step in to pay for care. Medicaid won't pay for assisted living, but it will cover nursing home care and many states also pay for home health care services for eligible people. However, states are required by the federal government to recover the cost of long-term care from estates whenever possible. That means, for example, if a parent's home is sold after his or her death, the proceeds could go to the state instead of heirs.

Relying on Medicaid is not an ideal way to pay for long-term care. Not only do people have to spend down almost all their assets, but it also limits where you can receive long-term care, Evans notes. Depending on your area, relatively few facilities may accept Medicaid patients.

[Read: What's the Difference Between Types of Long-Term Care Facilities?]

It's better to weigh your other options and plan in advance what is the best approach for your family. "It's not something anyone wants to do," Birchmeier says. However, it's better than the alternative of needing care and not having any way to pay for it. The earlier you start saving, the more secure you'll be later in life.



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