Don’t let inflation deflate insurance’s value

My mother, 86, and my father, 92, pay about $9,500 a year for long-term care insurance that might be needed someday if their health declines to the point where one of them must be placed in an assisting-living facility or nursing home.

Thirteen years ago, both of my parents bought long-term care policies that paid a $50 daily benefit for a nursing home stay. But when the price of nursing care in their town rose to $100 a day, that $50 benefit became inadequate.

So when an agent came calling and pointed out the problem, they agreed to purchase second policies providing an additional $50 daily benefit.

Long-term care insurance is a lot like homeowners coverage, which you must update every few years to make sure your policy keeps pace with the (presumably) increasing value of your home and possessions. Otherwise, you may be unpleasantly surprised to find your coverage falls way short when you actually need it.

About 500,000 Americans each year purchase long-term care insurance -- but only 40% buy an inflation-adjusting policy. (Most of these policies automatically increase the benefit by 5% each year to account for rising nursing home costs.)

As people get older and the need for care becomes real, they confront the same dilemma my parents did.

If they drop coverage because they can no longer afford the policies, they face the prospect of financial ruin -- or going on a public-assistance program such as Medi-Cal -- when they do need nursing home care. Plus, as people get older, the likelihood that they’ll need such care grows with each passing year.

The only winners in such a situation are insurers, who will have collected tens of thousands of dollars in premiums over the years without having to pay out a penny in benefits. Over the years my parents have paid out about $50,000 in premiums.

In my parents’ case, their health was still good enough that an insurer agreed to write new policies for them. But some insurers will deny additional coverage to customers because of their deteriorating health. My parents’ new long-term care policies came with a steep price tag. Premiums are up $2,000 since they first purchased coverage four years ago. And they have no assurance that premiums won’t go up again.

This year, as thousands of Californians consider buying long-term care insurance, which can pay for care at home, in an assisted-living facility as well as in a nursing home, it’s crucial to understand how these policies work and take steps necessary to avoid future problems.

In California, the average daily cost of nursing homes is $147, according to the California Partnership for Long-Term Care, a state program in the Department of Health Services. And with costs rising about 7% a year, a day in a nursing home could cost $569 by 2023.

Policies with an inflation-adjustment feature are costlier than those without it -- often twice as much as those without such protection. Because the inflation coverage costs so much more, it’s a harder sell for insurance agents, so many don’t push it.

But buying cheap today can cost you plenty down the road should you require long-term care for an extended period. Consider: The cost of five years in a nursing home in California can easily exceed $268,000, based on today’s average daily costs.

Insurance agents often argue that some coverage without inflation protection is better than no coverage. But Dail Phillips, a former consultant to the California Partnership, says: “If you can’t afford the out-of-pocket difference later on, what good does it do?”

Families may end up “spending down” anyway--that is, spending virtually all of their assets and income on care before qualifying for government assistance to pay the bills.

People shopping for policies also need to look at the history of rate increases for the policies they are considering

The useful “Long Term Care Insurance Company Rate & History Guide,” published by the California Department of Insurance, shows that state regulators have granted increases of as much as 50%. Rate information is available in the department’s guide, which can be found on the Internet, at www.insurance.ca.gov. Follow the links for consumer information and guides.

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Trudy Lieberman can be reached by e-mail at trudyal530@aol.com. Health Matters appears on the third Monday of the month.