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Long-term care insurance worries Baby Boomers

Kathy Kozakiewicz, 59, of Phoenix, decided to buy long-term care insurance after her father-in-law was diagnosed with Alzheimer's disease. He had to wait 18 months until space opened at a local Veterans Affairs nursing home, and during that period, the family was responsible for his care. Kozakiewicz and her husband, both retired federal workers, were determined to spare their children from that experience.

But now, the Kozakiewiczem fear that their insurance could become unaffordable. John Hancock, which has a contract with the U.S. Office of Personnel Management (OPM) to provide long-term care insurance for federal employees, recently asked state regulators for an average rate increase of 40% on most of its non-federal long-term care insurance policies. "This makes me worry when the five-year deal that OPM struck with them has to be renegotiated, that our rates will skyrocket as well," Kozakiewicz says.

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Millions of aging Baby Boomers face a similar concern. Long-term care insurance is supposed to protect seniors and their families from the soaring costs of nursing home and home-based health care. Increased use of long-term care insurance would also reduce the burden on Medicaid, which accounts for 43% of the cost of nursing home care, according to the Kaiser Family Foundation.

But the same factors that have highlighted the need for long-term care insurance — a rapidly aging population, lengthening longevity and unpredictable health care costs — have made it increasingly unprofitable for insurers. Some, such as John Hancock, Genworth and Bankers Life and Casualty, have asked state regulators for rate increases of 30% or more. Others have left the business. Earlier this month, MetLife announced that it will stop selling long-term care insurance. The company said it will continue to provide coverage to existing policyholders. "While this is a difficult decision, the financial challenges facing the LTCI industry in the current environment are well known," Jodi Anatole, vice president of long-term care products for MetLife, said in a statement.

In addition to health care hyper-inflation, insurance companies are struggling with record low interest rates, which have dragged down investment returns. "Sustained low interest rates are to the long-term care insurance industry what $4-a-gallon gas was to the SUV market," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, a professional organization for agents who sell long-term care policies. "It's a game changer for some — not all — and consumers need to understand that."

How to reduce costs

Wealthy Boomers have sufficient assets to pay for long-term care, and low-income Boomers will probably be eligible for federal assistance. But for the vast swath of graying middle-income Boomers, long-term care insurance fills an important vacuum, industry representatives say. Medicare doesn't cover long-term care, and Medicaid kicks in only after you've exhausted most of your assets. In addition, relying on Medicaid will sharply reduce your options for long-term care, says Elinor Ginzler, an expert on aging issues for the AARP.

For example, AARP research shows that the vast majority of Boomers like where they're living and don't want to move to a nursing home, Ginzler says. Medicaid doesn't typically pay for home health care. Most long-term care policies include coverage for at-home care, and if you need nursing home care, you won't be limited to facilities that accept Medicaid patients.

Frank Darras, an attorney who has represented policyholders in lawsuits against long-term care insurers, says he's seen a lot of deceptive practices by insurance companies. But he's still a fan of long-term care insurance, especially for Boomers who can't count on someone to care for them when they can't take care of themselves.

His list of "must-haves" for long-term care insurance includes singles, seniors whose children live far away and women. Women, Darras says, tend to be the primary caregivers for their parents and spouses and usually outlive their husbands. "By the time you're 80, you're worn out, and there's nobody left to care for you," he says.

Deborah Patrick, 55, a registered nurse in Marietta, Ohio, says her experience as co-founder of an assisted living facility persuaded her to buy long-term care insurance for herself and her husband. The average stay in the facility was 10 years, and most residents weren't eligible for government assistance, she says. "The people who had long-term care policies — you could see the benefit," she says.

After the bear market slashed the value of their investment portfolio, Patrick says, she valued her insurance policy even more. Long-term care insurance, she says, "is probably the most valuable of anyone's holdings."

Still, buying long-term care insurance entails some risks. The majority of consumers buy their policies between ages 55 and 64, according to American Association for Long-Term Care Insurance. Even if you wait until you're in your 60s — which will mean higher premiums — you could end up paying monthly premiums for 20 years or more before you need long-term care. If your income declines, or premium hikes make your policy unaffordable, you may have to cancel your policy, wiping out your investment. And if you live independently until you're 95, then die in your sleep, you won't get anything back for your investment.

Currently, there's a wide variation in premiums for long-term care. Premiums for policyholders ages 55-64 range from $1,257 to $3,075 a year, according to the AALTC. The average premium for that age group is $2,200 a year. Average premiums for individuals age 65 and older are $3,250. By the time seniors reach their mid-70s, most policies are unaffordable or unavailable.

Ways to keep premiums affordable:

Opt for time-limited benefits. The biggest rate increases have been for older policies that provided no cap on the number of years they'd cover, Slome says. Consumers can lower premiums by up to 39% a year by buying a policy that limits coverage to three years, he says.

For most people who are in good health, three years of coverage is sufficient, says Howard Mills, director and chief adviser of Deloitte's Insurance Industry Group. "Most of the cost of the health care system is incurred in the final year of life," he says.

•Include a waiting period. Like a higher deductible on your car insurance, a 90-day waiting period will lower your premiums, Slome says. Most people can rely on family and friends to help out until their coverage kicks in, he says. Remember, too, that if you require long-term care because of a stroke, broken hip or similar affliction, Medicare will typically cover you for the first 20 days. While some insurers sell coverage that takes effect immediately, that's "a luxury few can afford and protection most won't need," Slome says.

Research the history of rate increases. Darras recommends asking insurers: When was your last rate increase, and how many increases have you had in the last 10 years? You can also get that information from your state's department of insurance. Your state insurance department can also tell you if there have been a lot of complaints about the insurer, Darras says. To find your state's insurance department, go to www.naic.org.

Stick with established companies. It may be a long time before you need long-term care, so you want an insurer that will be around at least as long as you will. Darras also recommends buying from companies that sell other insurance products, such as annuities and life insurance. Those companies are better able to withstand short-term losses in their long-term care policies, he says.

They may also be more expensive. John Reynolds, 60, of Marietta, Ga., says he pays a higher premium for his policy from Northwestern Mutual than he could have gotten elsewhere. But Northwestern Mutual hasn't increased its rates since it started offering policies in 1998. Reynolds believes that's because the company has accurately projected the cost of claims.

Get help. Long-term care insurance is extraordinarily complicated. There are no standard options you can compare on the Internet. Policies may cover nursing home care, assisted living, home care or a combination of services. Some will pay a family member to care for you; others require you to hire a certified health professional. Some policies will pay you a lump sum to use however you want, once you're eligible for coverage.

Policies also have different "triggers" that must transpire before your coverage kicks in. Generally, insurers require that you need assistance with at least two "activities of daily living (ADLs)," such as bathing, eating or walking. Unscrupulous insurers sometimes exploit ambiguity over ADLs to deny claims, Darras says.

Consult with an insurance agent or broker who specializes in long-term care insurance and can help you identify a policy that will fit your income and needs. Even then, you may want to have an attorney review your policy before you sign up, Ginzler says. "This is one of those times when you want to be a very wise consumer and spend the time to read all the fine print."