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The growing cost of long-term care

Who pays for long-term care?

Without long-term care insurance, the people who need the care pay the bills. Many people don't realize until it's too late that private health insurance, Medicare, and private Medicare supplement insurance will cover little, if any, long-term care expenses. That leaves most people paying their long-term care costs out of their own pockets until they are impoverished and can qualify for Medical Assistance. Also, if you are in need of LTC benefits it is too late to purchase a policy.

Because Medicaid is a welfare-based program, it requires you to spend down your assets until you reach the poverty level. Currently, about 50 percent of all nursing home costs in Minnesota are paid by Medicaid for people who have wiped out most of their assets and income paying for long-term care expenses. Be aware that many of the techniques used in the past for shielding countable assets (in order to qualify for Medicaid) have been severely restricted under federal law (Omnibus Budget Reconciliation Act of 1993).

Purchasing long-term care insurance can help cover much of the costs and can ease the burden on your spouse or adult children who are likely to be in charge of paying the bills and handling all the paperwork.

How much does long-term care insurance cost?

As with other types of insurance, the cost of long-term care insurance varies according to the coverage you select and other factors, such as your health, medical history, and most importantly, your age when it is issued. The older you are when you purchase a policy, the more you will pay. However, the younger you are at the time of purchase, the longer you will pay premiums.

The choices offered and to be considered when purchasing a policy include the following:

  • Elimination period: the initial length of time receiving care before the insurance starts paying benefits.

  • Daily benefit: the maximum payment per day of care.

  • Maximum benefit length: the total length of time that the policy will pay benefits.

  • Maximum dollar benefit: the total benefits that could be paid. (This equals the daily benefit multiplied by the maximum benefit length in days.)

  • Nonforfeiture benefit: a reduced benefit that may be available if the policy lapses.

  • Inflation coverage: an automatic increase in the daily benefit, usually 5 percent per year.

  • Type of coverage: Nursing home only, home health care only, assisted living, or some combination of the three.

How are premium rates determined?

In setting premium rates, insurance companies have to make a number of assumptions about the cost of future events, such as the following:

  • the amount of benefits they are likely to pay out

  • how many policies will lapse for nonpayment of premiums or due to death

  • the cost of administering the policy, including profit and risk charges

  • investment returns on the company's assets

  • the rate of usage of long-term care services

In addition, unanticipated changes in medical care, social programs, and consumer behavior can have a big impact on the rate of usage of long-term care services, which may result in the original premium rate being inadequate to cover the costs.

Any company must have a goal of setting the premium rates high enough to cover the costs, but low enough to attract buyers.

The Department of Commerce, which must approve all premium rate increases, employs an actuary who reviews each company's rates and the supporting documentation to decide whether they may be excessive or insufficient to cover anticipated costs. Premium increases must be justified by detailed actuarial documentation about the company's experience compared to its previous assumptions.

Why are premium rates increasing?

Most companies have experienced significant negative financial effects from changes in interest rates and lapse rates.

Ten years ago, a typical long-term interest rate assumption might have been around 7% to 9%. It was impossible to foresee that long-term interest rates would drop to about half of that level.
Since earnings on assets provide a much of the money to pay claims, this affected the needed rates.
In addition, policy lapse rates--the proportion of policyholders that stop paying premiums and let their policies terminate each year--were formerly about 10% to 15% of policies each year for the first few years after policy issue, and 4% to 6% in later years. However, typical lapse rates are much lower now. When a policyholder lapses his or her policy (unless the policy included a nonforfeiture benefit), most of the premiums that were paid can go toward other policyholders' claims.
Companies anticipated higher lapses when they originally set the premium rates, but those premium rates are now likely to be insufficient to cover claims.

Changes in the frequency and intensity of usage of nursing homes and home health care can also affect the rates, but such changes don't appear to have had much of an impact. Companies have generally not reported increases in such use, and most companies don't have enough claims experience for statistical credibility. A few companies have experienced higher levels of usage, but there may be such factors as different levels of underwriting rather than changes in average usage.