There is lots of talk about the importance of financial security in retirement and what is most likely to upset the apple cart. High medical costs are typically cited as the biggest threat. Even a bigger concern, though, is the cost of long-term care, and most retirees don’t have long-term care (LTC) insurance. It was never cheap, but policies today are substantially more expensive and becoming an endangered species as many insurers exit the business. What can middle class folks do, and why should executives and managers at nursing homes and other qualified care facilities care?
The answer might be the so-called nursing home doublers, available in a growing number of annuities for no or minimal cost. They typically double income payments for annuity holders who wind up in a nursing home or require professional at-home care for up to five years or until the cash value of the annuity is exhausted. Unlike LTC insurance, doublers fall short of covering the full cost of nursing home care. Still, they offer some peace of mind for people who cannot afford the insurance. And, for nursing homes, it mitigates the threat of being forced to accept lower Medicaid payments for patient care and coping with depressed patients who have worked all their lives and have nothing to show for it.
“Everyone in retirement is afraid of running out of money,” says Bernie Moritz, a Somerset Wealth Strategies client who lives in Traverse City, Mich., who with his wife bought three annuities with doublers in the last 18 months. “Doublers are not as good as long-term care insurance, but they are better than nothing,” Moritz says. “They are a way to plan for long-term care.”
This annuity feature, offered by roughly 10 insurance companies, offers tangible hope for Americans in their so-called golden years, who simply aren’t saving enough for retirement. In a recent study, the Employee Benefit Research Institute reported nearly 60 percent of Baby Boom and Generation X families are poised to retire in good shape. But there is a huge catch: This excludes the cost of long-term care. If you factor that into the equation—and experts say that 70 percent of people 65+ will need some form of long-term care—the percentage of couples with insufficient funds at least doubles after 20 years, says the Institute, assuming that couples will retire at 65.
The LTC insurance crisis helped spark the birth of nursing home doublers. They didn’t expect interest rates to fall to record lows and stay there. They also misjudged the lifespan of policy holders entering nursing homes. On average, people remain there three years, one third longer than expected, costing insurers materially more.
Only about a dozen companies are still selling LTC insurance policies, less than 15 percent of the total a decade ago. Meanwhile, many remaining players keep increasing rates. For example, The Wall Street Journal has reported that one prominent annuity purveyor has raised rates three times since the late 1990s, including a hike of more than 50 percent in 2012. Competitors have hiked rates as much as 75 percent-plus this year or last year. Policy holders don’t have the option of switching to another insurance carrier because they will charge even more.
How doublers work
You can’t have a nursing home doubler without buying an annuity, of course, and even a modest annuity is not inexpensive. But annuities make enormous sense for retirees if they don’t exceed 50 percent of their financial assets. Annuities allow holders to reduce dependence on the finicky stock market and enjoy a guaranteed income for life. The market’s ups and downs can be downright terrifying for people of a certain age, who no longer earn a living and rely on stocks for the bulk of their income.
Doubler is a loose term. Although payments most commonly double in the case of an LTC scenario, in some cases the extra payments increase 50 percent, not 100 percent, and in other cases they triple. What is consistent, however, is that doublers are always free or cost very little. Insurance companies use them as a tool to gain market share.
Consider, for example, one annuity that is sold with—or without—the nursing home doubler. If a 60-year-old man invests $400,000 in this annuity with the nursing home doubler—which it calls the confinement rider—and waits five years to take withdrawals, the annuity will grow to $554,497 in value and a pay a five percent annual income stream, or $2,310 a month. The same policy without the confinement rider would pay exactly the same but the account value of the policy—what a beneficiary would inherit—would be $2,000 higher over five years – obviously a very small difference.
A nursing home scenario
Bernie Moritz and his wife bought annuities with the nursing home doubler after researching the LTC insurance market. They didn’t like what they learned. There were too few policies available, they were too expensive and the couple had no way of knowing how much policy prices might rise in the future. Moreover, the Moritzes feared that the insurer behind an LTC insurance policy they purchased might eventually exit the business, leaving them stranded. So they decided to buy an annuity with a nursing home doubler instead, a decision Moritz calls “a no-brainer.” It is also true that some people who buy LTC insurance and never use it suffer buyer’s remorse because they spent thousands of dollars for nothing. This will not happen with a nursing home doubler because the price, if any, is so low.