There could be a lot of people in this situation...
They were smart enough to buy a policy for long-term care 5–10 years ago. First, I want to say, "Good for them." When you look at the cost of long-term care insurance at different ages, it's easy to see that buying it when you're younger is better. This seems like a no-brainer, but I'm here to tell you that the differences in premiums are huge. Look at the premium at 45 and compare it to the premium at 65, which is when most people start to think about long-term care.
But, in Arizona, the cost of a nursing home was about $120 a day about 5 or 6 years ago. This equals about $43,000 per year. The average income today is $70,000 a year.
When people find out about this, a lot of them want to do what they need to do to make their coverage more in line with what it costs now. When they start to look around, they find two things...
The premium is a lot higher because they are older. Often, it's so high that you can't even pay for it.
It makes sense that if you look at the same coverage at an older age, the premium will be higher, but there is another historical factor as well. Over the past five years, premiums for long-term care have gone up by about 40%. A lot of this was because of how the insurance company priced things at first. The actuaries started their mathematical assumptions with statistics about the general population. This was a shot in the dark in many ways. They had to begin somewhere, though. As time went on, they found that the number of claims was much higher than they had thought. After an insurance company has done enough business for it to be statistically important, it starts to use real-world experience.
So, people who want to increase their coverage are usually looking at premiums that are off the charts. This is because they are older and insurance companies have changed how they price their plans.
But there may be a way out, depending on what's going on...
People have CDs and annuities in large numbers. Most of the time, the CD is money for "rainy days" or "emergencies." "Non-qualified deferred annuities" is what the annuities are called. Most of the time, they just sit there, like a CD, but for a longer amount of time. Over 90% of people die with their annuity "as is," which means that it is never turned into some kind of income.
Some insurance companies will let you turn a CD or an annuity into a special product that combines an annuity with long-term care.
It works like an annuity in that it grows tax-free at an interest rate that is set every year. But if the person needs any kind of long-term care (adult day care, respite care, hospice care, assisted living, or a full-fledged nursing home), the annuity can be used to pay for it. Most of the time, money can be taken out over a three-year period. Keep this three-year period in mind, because it will be very important in a moment.
So far, this doesn't seem too different from just taking money out of a CD or annuity. But there is one very important reason to switch to an annuity and long-term care plan. Some insurance companies will let you add a rider that covers you for the rest of your life. This is very helpful for a few reasons...
First, most people have a plan for long-term care for the next 3 or 5 years. When the three or five years are over, that's it. Second, medical progress is making people live longer. Is one of your kidneys failing? No worries, a team of doctors will just put in a new one. Third, the biggest problem is not with people's health in general. A person could have good health, get Alzheimer's, live for a very long time, and spend all of their money on health care.
Let's talk about the three years again. The person has a three-year policy for long-term care that is not good enough. They switch their CDs or annuities to this annuity/long-term care plan, which is also good for three years.
Here's the main idea. If they added the lifetime rider, which goes into effect after three years, they would be set for life.
Last, let's talk about the part about not having to pay premiums...
By putting a CD or annuity into this plan, the person has made another three-year plan for long-term care. No money needs to be spent.
There is a cost to adding the lifetime rider. But since it doesn't start for three years, it's like a traditional long-term care plan with a three year "waiting period" instead of the usual 60, 90, or 180 day wait. So, the premium isn't all that high.
Second, you can pay the premium by taking money out of the annuity itself. Today, if there was a gain in the annuity, the person would have to pay taxes on the withdrawal, but after December 31, 2009, withdrawals like this won't be taxed. In the Pension Protection Act of 2006, this is a new rule.
If you don't have enough insurance and are worried about it, take a look at your situation and see if this could help you.
