Long-Term Care Insurance: A lifeline or a financial nightmare for seniors?

Not long after her husband died in 2004, Alice Kempski, a retired nurse in her early 60s, bought an insurance policy designed to cover the costs she would incur if and when she needed long-term care in her elder years.

Thirteen years and $30,000 in premiums later, hobbled by osteoporosis and in need of help bathing, she filed a claim to cover an enhanced level of care — but her insurer had gone insolvent, and the Pennsylvania state insurance guaranty fund that had taken over the policy ruled she hadn’t lost a sufficient number of daily functions to trigger coverage.

Kempski died in 2021, but not before paying nearly $11,000 more in premiums and experiencing another claim denial. Her insurers never paid for any of her care.

“This is what they tell you to do: be a good citizen and pay for your long-term care,” said Kempski’s daughter, Ann, a Silver Spring resident who oversaw her mother’s care. “That’s just what she did, and the money wasn’t there for her.”

The Kempskis’ experience reflects the potential peril behind a decision millions of Americans have made as a way of dealing with the exorbitant costs many will face as they or their loved ones age into their senior years: buying long-term care insurance.

This specialized form of insurance, held by nearly 140,000 Marylanders and about 5.8 million Americans, ideally allows the buyer to pay a relatively modest monthly premium for a policy that will, after a period of years, generate benefits to pay for an array of services for the elderly. Depending on the holder’s health, sex, age and policy design, it can cover anything from bathing and preparing meals at home to assisted living and 24/7 nursing-home care.

Best purchased decades before it’s expected to be needed — experts suggest buying between one’s late 40s and early 60s, and the average holder cashes in past age 80 — long-term insurance can seem an attractive option at a moment of skyrocketing costs in elder care.

Some 70% of Americans who live to age 65 will need some form of long-term care at some point in their lives, according to AARP, and they’ll need it for an average of three years. The median cost associated with aging at home is now more than $6,300 per month, according to the American Senior Housing Association, while the average for living in a semi-private room in a nursing home $9,277.

Medicare covers few of these costs. Becoming eligible for Medicaid coverage often requires draining one’s finances, and with tens of millions of Baby Boomers now aging into retirement, the sticker shock is only likely to grow.

LTC insurance, as it’s often called, does prove worthwhile for many. Statistics show more than 95% of those who are able to afford some form of LTC insurance, as it’s called, and who end up using it, are glad they bought it.

Melissa Barnickel, a broker with Baygroup Insurance LLC who specializes in these policies, said that has proved true with virtually all of her clients.

“Getting [an LTC policy] transfers your risk to an insurance company, and that’s going to protect your 401(k) and other financial resources when you need care,” she said. “Those are meant to provide you with an income stream [in your later years]. I’ve never seen major problems with any of the policies that I’ve written.”

But LTC insurance has proved to be one of the more troubled and controversial lines in the field, especially when compared to more stable products such as life or auto insurance.

History shows that the industry — underestimating how long buyers would live and how many would use the policies — badly underpriced them while rolling them out in the 1980s and 1990s, and the errors baked instability into the system.

Carriers have escalated prices multiple times since then to compensate, leaving buyers with premium hikes of 200% or more, often after they’ve made decades of payments. More than 85% of the companies that carried LTC policies in the 1990s have stopped doing so, according to the actuarial firm Milliman, further escalating costs and leading to more stringent underwriting. About 35% of buyers use the policies, whether it’s because they allow them to lapse, die first, or have claims rejected in today’s more stringent underwriting environment.

Jennifer Wolff, a professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health, said buyers face a lot of “ifs” in buying the policies, and not just because relatively few can afford the premiums, which generally run between about $1200 a year for basic services and $8,000 at the luxury end.

“There’s a lot of risk involved,” Wolff said. “You often buy these policies decades in advance of needing them. Will the company still be around? Will you still need the policy? Many don’t have protections against inflation, which means they’ll cover less as time goes on. And there aren’t many companies offering them, so there’s variability in getting them to pay.”

Those are some of the reasons the market has shrunk since its heyday in the early 2000s, when some 7 million Americans had stand-alone LTC insurance policies — about 6.3% of the over-40 population. That figure has fallen to 4.8% in Maryland and 3.3% nationwide today.

Among those who have the coverage are Pat Montley and Sally Wall, retired college professors in their 80s who live independently in Lutherville. The active married couple are not happy about the changes they’ve seen in their policies, but they’ve paid so much into the system for so long, they’re reluctant to leave it at an age where they’re most likely to need the coverage.

“What it gives you is peace of mind,” Montley said. “You don’t have to sit around looking at your friends who are spending zillions on nursing homes or home health professionals… You hope you’re never going to need it, but you’re paying this money to kind of hedge that bet.”

Like most policyholders, they’re paying a good bit more than they did when they first bought in, which in their cases was in the early 2000s when both were in their 50s.

Montley started out with a premium of $1,050 per year for a maximum benefit of $182,500 and was told it wouldn’t rise unless the whole industry’s did.

After several company “resets” over 25 years, she now pays about $2737 per year, a 161% jump. She had to sacrifice benefits to get that, having her nursing-home benefit limit reduced from five years to three. Her current maximum benefit of $302,000 falls short of her original maximum when accounting for inflation.

Both are now well aware that carriers can appeal to state regulators for permission to raise LTC insurance premiums as often as once every 12 months. The Maryland Insurance Administration limits such increases to 15% per year. That’s a tougher constraint than most states have, but that hasn’t made the hikes any easier for the couple to take.

“We’re fortunate that we have the kind of income to afford this — many people would not — but we were shocked to see this kind of escalation,” Wall said.

The two are clients of Amanda Young, the CEO of Wesley SecureCare, a nonprofit that offers continuing care at home, a care model that allows seniors to “age in place” at home and receive services similar to those offered in assisted-living communities.

Members pay a significant up-front entrance fee but typically have considerably lower monthly bills than their peers with other aging plans.

Young offers discounts for clients who pay via LTC insurance, but most who do have had their policies for years.

She has advice for anyone considering buying into the system now. It includes trying to minimize the number of days you’ll be required to pay out of pocket before your benefits kick in — the elimination period — as even the industry average of 90 days can prove catastrophically expensive; considering a newer hybrid policy that blend LTC and life insurance or LTC and annuities, as they guarantees your premiums won’t be wasted; and work with a financial planner who can help craft a well informed balance between risks and potential benefits.

“It’s a good purchase if you have a good policy,” she said.

Have a news tip? Contact Jonathan M. Pitts at [email protected].

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