A friend recently came to a decision that fewer and fewer of us are able to make. At the age of 64 he bought long-term care insurance for himself and his wife.
Sales of long-term care insurance, which helps pay for home health care and stays in a nursing home, among other things, have declined in recent years, according to a study by Conning Research & Consulting. Only about 6 percent of all long-term care costs are now funded by insurance.
And this is happening even as the baby boom generation moves toward their '80s, when many of them will need long-term care and may not be able to afford it. Nursing homes today cost an average of $81,000 a year, according to Genworth's Cost of Care study -- and that figure will only rise.
The problem stems -- in part - from insurance companies themselves. Over the past five years, 10 of the 20 top insurers that sold long-term care insurance no longer do, including MetLife and Unum. Prudential only sells it only to groups.
Most were forced out of the business because they had mispriced the product: charging too little. Insurers often created a cascade of ill will, and gave long-term care insurance a bad reputation when they turned over the policies already sold to other insurers. The new insurers raised premiums and forced policyholders to either pay up or get out.
And the insurers who continued to sell long-term care insurance also raised rates. Increases of 20 percent a year are common. If you couldn't pay, you either lost your policy and all the money you had put in, or you were given less coverage.
This strategy comes perilously close to the classic bait and switch, and it was done to people who are both aging and least able to afford it. California recently passed a law protecting consumers against these abuses as one long-term care insurance product increased rates by 85 percent in a single year.
Low to no interest rates
Insurers have two answers for these criticisms. One is the economy. Insurers tuck away long-term care insurance premiums in long-term bonds for the day when the elderly will make claims. But bonds are paying low interest these days, while medical costs keep rising, so it's become a losing proposition.
The other is that people are simply living longer, even in nursing homes. And the longer they live, the more likely they are to need long-term care, according to the U.S. Department of Health and Human Services (HHS). But the harder it will be for them to find it. It's a conundrum.
The problem has forced the slow-to-move insurers to adapt. And their best solution is hybrid insurance, which combines a whole life insurance policy with a long-term care rider, or vice-versa. Over 16 percent of all life insurance products now sold include this kind of combination, according to Conning Research.
This is how it works. Let's say you buy a policy for $500,000. If you need long-term care you can use the money in the policy; if not the money goes to your heirs. So either way, you won't lose. And while you are putting premiums into these policies they are, as in other life insurance products, largely protected from taxation. This is an option that people like because it provides them with flexibility if they never need nursing home care.
Rich man, poor man
So why did my friend opt for a straight long-term care policy? To begin with, he is a former Wall Street executive and could afford it. "If you have an estate worth less than $500,000, don't bother with it," he says. "You can't afford it."
True enough. There are other options, but many of them are so difficult to understand that even Consumer Reports advises you to consult a financial planner.
The good news, at least for millionaires, is that if you're worth over $3 million, you can finance your final care yourself, and you really don't need long-term care insurance. My friend, however, is in the middle bracket. He's a cancer survivor and his wife, a nurse, was nervous about their future and wanted it settled.
"Basically," he says, "it's all about not leaving your kids stuck with the bill."