An effective way to safeguard your retirement savings from the high price of assisted living, in-home care or the cost of a stay in a nursing home is a long-term-care insurance policy. However, recent premium hikes have many baby boomers concerned that this type of coverage is no longer affordable.
Kiplinger’s recent story, “The Long-Term-Care Insurance Dilemma,” reports that the median cost of one year in a private room in a nursing home was $97,500 in 2017, according to Genworth's Cost of Care Study. A year of assisted living was $45,000, and 44 hours per week of home care–which most people prefer–was $49,000. Care costs have been rising by 3-4% per year over the past five years.
Rising costs have put pressure on long-term-care insurers, and the rates have spiked by at least 50% for most policies purchased between the mid-1970s and 2005. Some price increases are more than 100%. Almost every long-term-care insurer has raised rates at least once, and more rate increases are coming.
Insurers say they made major mistakes when pricing these policies: they thought more people would drop coverage, they overestimated the interest rates they'd earn on their investments and they underestimated the size and length of claims.
But there are ways to make long-term-care insurance more affordable.
First, don't drop your policy if you're hit with an increase. This is because a new policy will cost much more. If you can't afford the higher premiums, your insurer will generally give you several options. If you haven't bought a policy yet, you can still find coverage that protects a significant part of your retirement savings with affordable premiums.
You can reduce your premiums by purchasing a policy with less inflation protection and by getting a shorter benefit period.
The insurance companies have learned from their pricing mistakes and shouldn't have to increase premiums on new policies as much in the future. We hope.
Nonetheless, you should factor in potential increases, when calculating how much insurance you can buy. Plan for a 20% increase every 10 years.
Reference: Kiplinger (April 4, 2018) “The Long-Term-Care Insurance Dilemma”