Dear Michael: We had purchased long-term care insurance a few years back and, as expensive as it seems to be now, our agent told us getting new policies would be twice as costly for the same coverage. He also suggested we use an annuity with a long-term care rider on the policy to cover any extra expenses? Why does the current cost of our long-term care keep going up and how does an annuity with a long-term care rider work? – Underinsured on LTC

Dear Underinsured: People who purchased long-term care insurance during the late eighties and early nineties thought they were paying a lot for long-term care insurance back then. An average couple's premium was fifteen hundred to two thousand dollars for up to one hundred dollars a day of coverage for a lifetime of coverage.

Like most things in health care – medical costs, long-term care costs, Medicare and all the insurances associated with these things – costs have gone up over time. Buying one hundred dollars a day for LTC insurance back in the eighties seemed foolish when costs were around eighty dollars per day. Now, the average cost of care – per day per North Dakotan receiving care – is about two hundred and fourteen dollars per day.

The reason the costs of your existing long-term care insurance rose over the years is quite simple. Back in the eighties, insurance companies used the then current mortality rates showing eighty percent of men and women would be dead by seventy-two and seventy-four, respectively.  

What happened, by the two thousands, was eighty percent of their policyholders – who they thought would be dead and not on claims – are still alive and still producing more and more claims than ever expected. Insurance companies had four times as many policyholders alive than they anticipated back in the eighties and early nineties. Hence, many companies have had to raise their premiums to pay these claims.

Nowadays, to buy a decent long-term care policy – with two hundred dollar a day coverage – the costs for a good policy are twenty-five hundred dollars or more per person – if they are married. It's four thousand or more if they are not married because single people have a higher risk rate of needing care as they have no significant other to care for them at home.

Insurance companies, recognizing these fears of their clients of being under or uninsured, have come out with a variety of plans to make it sound like they're going to give you more long-term care coverage – if you need it – by placing money into annuities. However, you really have to look under the hood to see if these plans are what they say they are.

For example, a popular type today is a policy with an income rider/long-term care rider added on to the policy. The costs of this rider are about .75% to .85% of the amount you place into the annuity to begin with – and are subtracted each and every year.

These contracts will then show an income rider which states if you need to withdraw income from the contract at some point in time, we will give you income based on the following formula. We'll compound your initial deposit by six or seven percent per year. When you decide to take income, you can take income of five to six percent a year of this compounded amount for the remainder of your life. If you have an LTC rider, they will pay double the amount of income for long-term care. Most are seven to ten year surrender charge contracts, as well, so liquidity is not great.

What you have to keep in mind is this. When you elect either the income rider or the long-term care benefit rider, the amounts paid out are deducted from the actual cash value of your initial deposit – under an annuity. In essence, the company is saying, we'll give your own money back to you and if you outlive the time period of either the income amount or the long-term care amount, then you come out ahead. On the long-term care side, they only pay for five years – generally – and then they go back to just the income amount.

However, most people don't elect these riders until they are in their late seventies or eighties or when they are in a nursing home. Longevity isn't great if people buy these at seventy, wait until eighty to use them, and for most people, would only be on claim just long enough to use the money they originally deposited with the company. It's a good bet for the insurance company that most of their clients the company will just be paying back the amount they initially collected plus any interest less rider costs.

There are also long-term care life insurance policies. These work a little different in that the initial deposit buys a death benefit (normally about 'double' the deposit).

They also provide three to four times of the initial deposit in a long-term care insurance pool of money – typically for a minimum of six years of coverage versus a maximum of five for annuities – and all claims are deducted from the death benefit.

If you want money to go to your heirs, all claims would be deducted from the 'double death benefit' versus your actual cash values of a long-term care annuity. These contracts do not, however, provide any sort of income stream but provide one hundred percent liquidity in three to seven years.