Long-term care insurance needs tailoring

Your Money

February 25, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Chicago Tribune

Long-term care insurance is becoming the Rodney Dangerfield of the retirement world.

The product gets little respect in certain circles, and consumers know little about its potential benefits, new research shows.

A Consumer Reports review of 47 policies concluded that for many people long-term care insurance is too expensive and coverage too spotty to warrant paying for it.

In addition, the Financial Planning Association recently gave an award to an article in its journal that used probability statistics to make the case that the insurance is a better deal for women than for men when compared with investing money that would have gone to premiums.

Meanwhile, an AARP survey of 1,456 adults 45 and older released in December found that fewer than one in 10 could reasonably estimate the cost of nursing home care and more than half believe, incorrectly, that Medicare pays for assisted-living services. This is a failure to communicate long-term care's real benefits, a lobbying group for the industry says.

This month the American Association for Long-Term Care Insurance in Westlake Village, Calif., issued a study that it says illustrates how consumers are, indeed, receiving value from the insurance.

The group, which estimates that 8 million Americans have long-term care insurance, said the industry paid $3.3 billion in claims last year, the highest payout ever. And more consumers are using the insurance to pay for in-home care instead of nursing home facilities, the group said.

"People think they won't need long-term care or that the insurance may not be beneficial, but the opposite is true and the increasing amount of benefits paid to policyholders validates the important role this protection plays," said Jesse Slome, the association's executive director.

Analyzing industry data, the group found that about a third of benefit payments were allocated to home care rather than for nursing homes.

So what message should consumers take from these drastically opposite points of view?

Today's long-term care insurance products are offering new ways to customize premium payments and benefit levels that can make them more attractive than the models used for previous studies, insurance advocates said.

And in the case of the academic study on probability of usage, consumers should look at the findings as a way to modify the bells and whistles on a policy - not to roll the dice and try to beat the odds of needing the insurance, one of the study's authors said.

"Long-term care [insurance] is probably worthy of purchase, but based on probability it just may not be as good a deal for men as it is for women," said Joel Gold, a financial planner and University of Southern Maine finance professor.

Comparing men's and women's likelihood of needing long-term care with the cost of premiums and the lost opportunity that money would have conceivably earned in the financial markets, Gold and two colleagues concluded that women's higher probability of using nursing care made the insurance more cost-effective for them.

That said, for people who do end up needing in-home assistance or care in a nursing facility, the insurance can be vitally important, Gold points out.

The research on probability of use simply points out consumers' need to look at their risks objectively and buy a policy that suits their budget and needs, Gold said. If your budget can handle a year or two of nursing care, but you want to insure your nest egg against a very long and costly stay, there are policies with long elimination periods and relatively low premiums, he said.

Conversely, some people may view the statistics and see how low the probability of a very long stay is, and adjust downward the number of years a policy will pay.

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