Insurance plans that cover custodial care at a nursing home is a failed business model; and it is now showing up in unaffordable insurance premiums.
First, a little history on long-term care insurance plans. Back in the 80s and 90s, government budgets were struggling with increasing numbers of people on Medicare and Medicaid. One of the most expensive health services is providing full-time care to someone unable to care for themselves. To reduce the number of people receiving money for this care, states tried to offload them by providing favorable terms for insurance companies to offer a new product; called long-term care. This insurance product would financially support people who needed temporary full-time care so the government wouldn’t have to pay for it. As part of the program, Medicare and Medicaid wouldn’t start until all of someone’s assets were fully depleted to pay for their care.
Insurance companies tried setup long-term care policies but there is a problem. Actuarially, the plans could only support people for a maximum of 3 years and remain slightly affordable. While some policy holders needed care for less than three years (where the insurance worked for them), a huge number of policy holders needed many more years of care. So there are lots of people who paid for the insurance, ran through it in 3 years, and still lost all of their savings to pay for their government care. (I mention in my book that you are better off self-insuring for the 3 years that these plans last.) It turns out that insurance companies failed to take into consideration the increasing longevity and increasing cost of health care. These two components have tripled the already-expensive premiums on these insurance policies. Even with these high premiums, insurance companies are still losing billions on these policies and many have abandoned long-term care. Genworth alone loses over $100 million a year on their long-term care policies.
As the math is catching up with insurance companies, consumers are feeling the pinch. Some policies have increased their premiums by over 400% in just 2 years. All of this is because the arithmetic simply does not work for long-term care insurance. The industry is struggling to survive by coming up with hybrid ideas, such as linking it with a life-insurance policy. But until there is a new insurance model that works, my best advice is to self-insure and save the money you would have spent on your long-term care insurance. By doing this, you’ll be way ahead financially because additional premium increases will continue. If you are unable to afford these increases and cancel your policy, then all of the money you’ve paid to keep your policy in force will have been wasted.