Alternatives to Long-Term Care Insurance

Feeling priced out of the long-term care insurance market these days?

You're not alone. According to figures from Genworth Financial, the sales of long-term care, or LTC, insurance plummeted 32% between 2005 and 2009. This is in part due to premium hikes that reflect increasing claims on existing policies and the potential impact of the rising costs of home health care and assisted living on future contracts.

"It's highly priced," says Norse Blazzard of Blazzard & Hasenauer, a Florida firm that advises insurance companies. "The problem with long-term care insurance is that anybody who can afford it doesn't need it, and anybody who needs it can't afford it."

Long-term care also struggles under the weight of two historical anomalies today: the aging baby boomer population and rock-bottom interest rates. For insurers, that translates into more potential claims and meager investment returns with which to pay them.

"Some companies like MetLife and others have gotten out of the (LTC) business because they just couldn't price it properly," says Blazzard, who serves on the MetLife board. "They were losing their shirts."

All of which is forcing many Americans to consider plan B.

"What people need to do is get away from saying, 'I'm going to buy something that's going to take care of 100% of my need' and instead buy something that takes care of a large percentage of their need," says Dan Prescott of Prescott Pailet Benefits of Dallas.

Here's a look at several options available to address the financial risk that long-term care presents to you and your loved ones.

Self-Insure

One option is to ignore long-term care risk entirely and simply depend on your own assets to meet the financial need, when and if it should arise. As movie character Dirty Harry might say, "Do I feel lucky?"

Pros: If you never need LTC, you've saved that money to live on or include in your estate. In addition, you never have to worry about passing a medical exam for an LTC policy.

Cons: It you do need LTC down the road, depending on your resources, it could quickly drain your estate. According to Genworth, the average daily cost of a private room in an assisted living facility is $206 per day, or $75,190 annually.

Annuity Hybrids

Annuities, once shunned as poor-performing "granny insurance," have garnered a second look these days by offering a long-term care rider. Thanks to Internal Revenue Service changes, money invested in a deferred annuity with an LTC rider can be used tax-free to pay for long-term care as defined under the contract.

Pros: Medical underwriting is less stringent than LTC, you have greater freedom in how you use the LTC benefits, and if you don't need LTC, you can redeem the accumulated value of the annuity. Upon your passing, your heirs will collect on the annuity, less withdrawals for LTC.

Cons: Annuities require an upfront premium of $50,000 or more. The money is locked up for five to 10 years, with steep penalties for withdrawals. Investment returns are typically minimal.

Life Insurance

Life insurance, either alone or in combination with an LTC policy, can be effective in some estate planning situations. The life policy essentially protects the estate against the future costs for long-term care.

"People who have estates in the $1 million to $4 million range will have enough money to pay for long-term care if they have the need, but it could eat up their estate," says Jeff Derdiger, LTC specialist with Prescott Pailet Benefits. "So instead of buying long-term care, they buy life insurance."

"The life insurance is used to replace an estate that has been eaten up by LTC need. That way, they can draw down on the interest and principal from their investments for long-term care if they need it, with a guarantee to leave their children something through the life policy."

Pros: Protects the value of your estate against LTC risk. No LTC underwriting concerns. You also could supplement the life policy with a lesser-amount LTC policy to insure part of the risk.

Cons: It's only a sound strategy for those who won't need LTC insurance.

Possible Future Products

Allowing that insurers are still reeling from the current economic environment, what options might appear on the horizon to rescue the nonmillionaires among us?

Preston says he'd like to see a long-term disability plan that automatically reverts to LTC coverage at age 65 or 67, with a guaranteed issue provision for your spouse at age 65. Both types of coverage are needed but struggling today.

"That would give people the peace of mind by transitioning that disability premium over to a long-term care contract that they don't have to worry about qualifying for down the road," he says. "I think that would be a fantastic seller."

Derdiger dreams of a term life version of long-term care insurance in which the premium rates are guaranteed for the term of the policy.

"It would eliminate the concern of a future rate increase and how they're going to be able to afford it when they're no longer working," he says. "They don't mind paying a higher premium during their earning years if they can make sure that it's not going to be a problem for them when they're retired or their income drops."

But Blazzard isn't optimistic that long-term care insurance per se will be viable, much less affordable, anytime soon.

"We need it desperately. The problem is, in today's economic climate, I don't see how anybody can sell it at a profit, because you either have to crank up the loads so high that nobody can afford it, or you've got to crank down the benefits to where there is no point in having it. It's a bit of a conundrum that I don't know how to solve, and I don't think any actuaries do either."