Long-Term Care insurance too expensive? How about short-term care insurance?
In an attempt to make increasingly-costly coverage affordable for middle-class buyers, some insurers are selling policies that offer bare-bones personal care benefits—sometimes as little as $50-a-day for three months. These policies are more affordable, but are they worth the money?
Bankers Life and Casualty Co. has been selling these low-cost, low-benefit dollar policies for a decade, but Brian E. Millsap, Vice President of Product Management for Long Term Care, says they’ve taken off in the past few years and now outsell traditional LTC insurance at Bankers.
To understand how they work, first think about those traditional policies. Millsap says a Banker’s LTC policy typically covers $145-a-day for an average of 2.7 years. That’s a maximum of about $143,000 in benefits. About half of its buyers also get inflation protection to help offset future increases in the cost of care. For the average Banker’s customer, who is 63, such a policy costs about $2,100-a-year.
If that’s out of your price range, you’ll need to compromise. You could, for instance, buy an average daily benefit of $50 for life (the design of the now-dead CLASS Act). However, few private carriers offer lifetime benefits any more.
Since about 70 percent of claimants die within two years of receiving benefits, you could try an alternative: a big daily benefit for just a few years. But those can be very expensive as well. A $250-a-day, two-year policy with inflation protection would cost a 63-year-old about $3,500, according to one carrier.
So how about a very short-duration policy with a low daily benefit? Keep in mind that this insurance, like traditional LTC overage, is not health insurance. You are eligible for benefits only when you need help with activities of daily living such as bathing or eating, not just because you are sick.
Millsap says an average short-term care policy from Bankers provides $140-a-day for just 220 days, or about 7 months. That’s about $31,000 in total benefits. 85 percent of buyers get no inflation protection. For a 63-year-old, the average annual premium is less than $750.
That’s much more affordable, of course. And if you think you’ll be able to get care at home and will have family members to help, such a policy might pay for some important extra assistance from a home health aide. They may also be easier to buy if you have pre-existing medical problems since underwriting is less strict. Combined with enough savings, it might even get you access to a high-quality nursing home that might not take Medicaid patients.
But these policies come with some big disadvantages.
$140-a-day would fall far short of the $200-$350 you’d need for a nursing home stay so you’d need to make up the difference through savings or gifts from family members. In addition, by not buying inflation protection, steadily increasing costs of care will eat away at what is already a modest benefit. For instance, assuming 4 percent inflation, that $140 daily benefit will be worth only about $60 in 20 years—enough to pay for only about 3 hours of home care.
If you don’t have other savings, or will need more than limited care, you’ll almost certainly end up on Medicaid. These policies may delay Medicaid eligibility for a few months, however, making the government program the biggest beneficiary of this insurance.
Note: Short-term policies are not eligible for the Long-term care Partnership program, which allows people to preserve additional assets and still receive Medicaid benefits.
Another way to think about it: If you buy at 63, you may pay premiums for 20 years before going to claim. At $750-a-year for a $140-a-day, 220-day policy, you’ll pay $15,000 to buy a maximum of $31,000 in insurance (assuming premiums don’t go up).
One financial planner who specializes in middle-market clients is skeptical. He says these policies are “like buying a stuffed bear.” They may make you feel better, but they won’t provide any real financial security.
That’s especially true for the very low-end policies. After all, $50-a-day for 60 days is a maximum benefit of just $3,000, and that won’t buy much personal assistance. Buying $140-a-day for a year makes more sense, but you still need to think hard about what will happen when the benefit runs out.