Planning for long-term care can have a big payout
Phyllis Douglis was already 70 when she bought long-term care insurance. Diagnosed with rheumatoid arthritis, the retired New Jersey teacher found just one plan with a lifetime cap of $100,000.
"The only thing I could get was limited, because of my physical conditions," Douglis said.
Though the price was steep—$140 a month—she didn't hesitate, and paid $20,000 in premiums over 12 years. Now 85, Douglis has been collecting the benefit since 2010, when she moved into an assisted living facility.
"I think more people should have it because they don't appreciate what's going to happen to them."
Her son Fred, 50, has already enrolled for coverage through work, after seeing how much his mom's plan has helped her stretch her retirement savings. "It's prolonging the point at which that money will get consumed, at the high rate she's paying out, because she's paying for the facility here."
Financial advisors like Crystal Cooper, director of financial planning at Strategic Wealth Management Group, have advised clients to enroll for long-term care in their 50s or 60s while they are in good health, to make sure they'll have coverage in their later years. The most affordable option for most people will be through a group plan at work or an association.
"There's a 71 percent chance of people over age 65 that at some point in their life they will need some type of long-term care services," Cooper explained.
Obtaining individual coverage has become more of a challenge. The market for long-term care insurance has been in turmoil over the past couple of years, just as demand is expected to surge, with 10,000 baby boomers a day reaching retirement age.
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Since 2010 three major insurers, MetLife, Prudential and Unum, all stopped selling plans in the individual market, faced with mounting losses on paying claims, which proved more costly than anticipated.
"Typically when these companies sell policies they're level funded. Which means that the premiums are invested in the early years to pay for claims that are going to occur later on," said Marc Cohen, chief research and development officer of LifePlans, a long-term care risk management firm.
But Cohen said in the last decade all of the insurers' underwriting assumptions proved wrong. Long-term care costs for health aides and nursing home care have been rising at a faster-than-expected 4.5 percent annual rate, while interest rates have been at a record low, making it virtually impossible to generate enough growth from premiums invested in the bond market.
The other thing insurers didn't anticipate more than a decade ago when they began selling plans was that the rate of clients letting their policies lapse has been far lower than with other insurance products.
"Once people buy policies they tend to hang on to them," noted Cohen.
Now, those providers which are still in the individual market like Genworth are raising rates sharply, up to 50 percent on some older plans sold before 2003. They are also tightening underwriting standards on newer policies, often requiring medical screenings as they do with life insurance.
Individual plan premiums can start at about $2,000 a year for healthy individuals in their 50s, depending on benefit levels. Most policies now cap lifetime benefits at three, five or 10 years of coverage. Most plans are also priced based on daily cost levels that range from $50 a day, which could cover help with household chores, up to $200 a day for nursing home care.
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Financial advisors say varying the combination on the terms and level of coverage, and inflation protection riders, can help bring costs down.
Women especially should consider enrolling for coverage well before retirement age, said Strategic Wealth's Cooper, because they face even higher rates under the new long-term care underwriting standards.
"Women live longer than men. Women are the predominant users of long-term care," she said. "So now it will be gender specific and [premiums for women] will be priced higher than men."
As with auto or home insurance, there's a risk of paying for costly coverage that won't be used. Unlike life insurance, there is no survivor benefit accrued with long-term care plans.
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But for Phyllis Douglis the bigger risk was that her crippling arthritis would cause her to go through her savings too fast, and that she would become a burden on her children.
"I didn't want the kids to have to take care of me that way, if I didn't have to," said the mother of two. "I wanted to make sure I had something there that they could resort to if they needed it."
The 85-year-old will soon max out on her benefits, but even having limited coverage was worth it, because it bought her more time before having to tap into her savings.
—By CNBC's Bertha Coombs. Follow her on Twitter: