Should I buy long-term care insurance?

 

The U.S. Department of Health and Human Services has estimated that almost 70% of today’s 65 year olds will eventually need long-term care. And some 20% will need it for longer than five years.
The U.S. Department of Health and Human Services has estimated that almost 70% of today’s 65 year olds will eventually need long-term care. And some 20% will need it for longer than five years.

Long-term care insurance is an interesting animal. As my father once said, “I can go broke now purchasing it or I can go broke later paying for the care instead.” Certainly, neither the insurance nor the care is inexpensive.

The first question you need to ask yourself really becomes, “Do you ever think you’ll need long term care?” Assess your risk by considering your current health, hereditary, longevity in your family, availability of family caregivers, and personal preferences. But keep in mind that just because Grandpa reached 90 in perfect health doesn’t mean that you can’t take a devastating tumble down the front steps tomorrow.

Consider your odds

Consider that the U.S. Department of Health and Human Services has estimated that almost 70% of today’s 65-year-olds will eventually need long-term care. And some 20% will need it for longer than five years.

On the other hand, Nolo.com reports that the odds of spending years in a nursing facility are slim:

  • Two-thirds of all men and one-third of all women, age 65 and older will never spend a day in a nursing facility.
  • Most nursing facility stays are brief — only about 10% of men and 25% of women age 65 and older spend more than a year in a nursing facility.
  • Only 10% of all nursing facility residents will stay longer than three years.
  • More than half of all nursing facility stays last six months or less. The average stay of those who enter a custodial care facility is about 18 to 20 months.

Consider your choices

If you’re afraid that you may join those percentages of those who will need long term care one day, you then have three choices in the matter.

  • My father chose not to purchase long-term care insurance. That’s called “self-insuring.” And he spent some 2 ½ years paying for assisted living before his passing.
  • My in-laws, on the other hand, chose to purchase a traditional long-term care policy. And it is still paying for an in-home caregiver.
  • As for my wife and myself? Knowing the risks, we have opted for a relatively new product to come to the market specifically tailored for baby boomers—a combo or hybrid policy.

Of the three options, which is right for you? That depends . . .

Self-Insuring

For those in the modest to middle-income range (as my parents were), buying a long-term care policy is simply not an option. It’s simply too expensive. And, unlike auto insurance, premiums for long-term care insurance don’t go down just because you haven’t made a claim.

The small numbers of insurers that write policies have been only hiking their premiums—while also reducing their benefits. As a result, it’s been suggested that long term insurance is probably not for you if:

Long-term care insurance is also not an option if you have had poor health. To the insurers, that’s practically a guarantee that you will need to use the policy—possibly sooner rather than later. There’s a saying within the industry that “your money pays for long-term care insurance—but your health buys it.” That’s because your health is the single most important factor in qualifying.

You also will not qualify if you are too old. If you are already older than 60, the cost of premiums will most probably price you out of the market at this tender age (Yes, I’m 60). One report noted that 44% of enrollees became ineligible in their 70s. And generally, policies are not even sold to anyone over 84. The fact is that even if you could find a company that would sell a policy beyond this age, the cost would be prohibitive.

If you’re in a higher income range (with assets of perhaps $2.5 million or more), you may also want to forego the pleasure of purchasing long-term care insurance. Given the financial wherewithal to pay for limited in-home care and the relative rarity of long, expensive nursing home stays (particularly when that bank account may have allowed for exceptional medical care along the way), you (and your heirs) may be better off without it.

If you fall into either of the above categories, you’ll be self-insuring—whether you want to or not. Simply put, that means relying on your own assets, the help of non-paid family caregivers or government aid programs such as Medicaid or Aid and Attendance through the Veterans Administration. Then, your choice of facilities may be very poor (in every sense of the word).

Finally, if you’re single without any heirs, it may not be in your best interest to consider a policy. Why? Wouldn’t I need care, too? What about the financial hit? Writer Paul Solman of NextAvenue notes:

For a single person, moving to a nursing home for care of indefinite length (as in the case of Alzheimer’s) generally means that the former residence can be sold and nearly all needs will be provided by the nursing home or paid for by Medicare. Lifetime income can now be used to offset the cost of the nursing home. Once your assets are exhausted, you are generally moved onto Medicaid, so the only reason to protect assets is to leave an inheritance. Therefore, it may not be financially beneficial for a single person without heirs to pay for long-term care insurance.

If you fall into any of these categories and would like to determine how much money you would need to save to pay for care in the future, The Federal Long Term Care Insurance Program offers a Self-Funding Tool to help you in your calculations.

Traditional Long-Term Care Insurance

Are you in your mid-50s (or younger) and still in good health? Do you think you may have the income to comfortably pay premiums until such time that you need to actually use the policy—even if those premiums increase substantially? Do you have assets worth $300,000 to $500,000 above the value of your home?

If the answer is “yes” to those questions, then traditional long-term care insurance that can help pay for home health, assisted living, skilled nursing, memory care or any of the preceding in combination, may be an option for you.

After you assess your risk (see above), you’ll want to consider the current out-of-pocket costs of long-term care itself. Genworth Financial maintains a website that can give you an accurate estimate for where you live, but the annual national median costs in 2017 were:

  • Homemaker Services:        $3,994 mo./$47,934 yr.
  • Home Health Aide:             $4,099 mo./$49, 192 yr.
  • Adult Day Health Care       $1,517 mo./$18,200 yr.
  • Assisted Living:                   $3,750 mo./$45,000 yr.
  • Nursing Care:

Semi-Private Room:           $7,148 mo./$85,775 yr.

Private Room:                     $8,121 mo./$97,445 yr.

Next, you’ll want to compare the cost of the insurance. According to Nolo.com, “Consumer and financial experts generally agree that LTC insurance is a bad investment unless the monthly premium is 5% or less of your monthly income.” The American Association for Long-Term Care Insurance gives examples:

  • A single 55-year-old male could expect to pay $1,870 annually for benefits that would grow to be worth $386,500 when the policyholder turns age 85.
  • A single 55-year-old female would pay $2,965 annually for the same potential benefit as her male counterpart.  This rate is substantially higher as women face a far greater risk of needing long-term care and account for two-thirds of all long-term care insurance benefits paid by insurers.
  • A couple in their 60s purchasing new long term care insurance coverage can expect to pay $3,490 for a potential benefit of over $666,000 in coverage should they begin needing care at age 85.

Keep in mind, however, that these examples are subject to wide variations for two reasons:

  • Barbara Marquand of NerdWallet reports that The American Association for Long-Term Care Insurance found that rates varied among insurers by as much as 94% in its 2016 price comparison.
  • Double-digit rate increases on the cost of the premium have also become the rule, not the exception. While any rate hike has to be approved by state insurance regulators, MetLife proposed rate hikes of 20 to 95% in 2015, while Unum was seeking an increase of up to 114% on its older policies.

Finally, if you’re considering a policy, you’ll want to study the different options available. As Joseph Matthews of Nolo.com notes, “When the policies’ conditions, exclusions, and benefit limits are figured in, the performance of these policies has been quite poor—at least in the decade of the 1990s, for which complete statistics are available.”

Mathews goes on to report that:

  • About half of all LTC policies lapsed before any benefits were paid; policyholders were unable or unwilling to continue paying their premiums.
  • Of those people who bought insurance and later entered a nursing facility, about half never collected a dollar from their LTC policies.
  • No benefits were ever paid to the many people who bought nursing facility coverage but instead received home care or entered a residential facility not covered by the insurance.
  • When LTC benefits were paid, they were usually far below the actual cost of care.
  • For many of the longest-term residents, benefits were used up before the nursing facility stay ended.

Given its track record, long-term care insurance certainly may not give you the best return on your dollar. In fact, writer Matthews calls long term care insurance, “a lousy investment.”

However, by taking advantage of tax deductions, as well as federal and state programs, you can leverage your purchase to get a higher return on your dollar and possibly make your investment a much better value.

Reducing your benefits may be a good option

If the costs of a comprehensive long-term care policy give you “sticker shock,” but you’d still like some protection, you also have the option to scale back coverage—combining a more limited policy with personal savings and the hope that a family member will step in to assist you. And that, in all reality, may be all you need.

Eleanor Laise of the financial magazine Kiplinger points out that, “Even when people do go into a nursing home, those bills may not be as enormous as many people believe. Half of men and nearly 40% of women who use nursing-home care never have a stay exceeding three months.”

They further note that, “Too often, financial advisers discuss only higher benefit levels that would cover the cost of assisted living or a nursing home stay.” Your best option may well be getting quotes on a policy that pays for a short time in a facility or a part-time paid caregiver while you remain living at home.

Combo or Hybrid Policies

As Baby-Boomers age without having put a plan in place, the window is rapidly closing (if not already slammed shut) on affordability due to age and/or health and the fact that, as a whole, we don’t want to give anything more than absolutely required to “the man,” insurers have come up with hybrid policies as their last grasp at what assets we may have.

Instead of making payments for years for something you may never use (and lose every penny of that money), the newer policies provide the option of paying for care and/or returning money back to the estate if you die before tapping any benefits. That is exactly what my wife and I have opted for.

In 2016, Howard Gleckman of Forbes reported that “For the past half-dozen years, insurers increasingly have been selling combination products that add an LTC rider to an annuity or whole life insurance policy. With these policies, if you become eligible for the long-term care benefits, you receive additional payments during your life. If not, you still get your regular monthly annuity payments or full death benefit.

“In 2015, for the first time, carriers sold about as many of these “combo” products as traditional LTC insurance. Until now, most have been designed as a single-premium—one big upfront payment. But in an effort to attract more middle-income buyers, some carriers are letting consumers spread payments over time.”

Barbara Marquand of NerdWallet notes that “The policy’s death benefit will be reduced — which means less money for your beneficiary—according to how much of the long-term care benefit you use. Some policies guarantee a small percentage of the full death benefit, such as 10%, even if you use all the money allocated for long-term care.”

It’s also important to know that some policies offer a “shared care” option for couples. This simply means that you each share in the total amount of coverage. If you reach your total amount of coverage, you can draw out of your spouse’s amount—or vice-versa.

While all policies are different (as with any traditional long-term care policy) and the initial investment could vary substantially, the American Association for Long-Term Care Insurance offers a comparison between three different plans. Obviously, it would pay to shop around for the best policy.

For each, they compared policies for a 65-year-old married woman with an initial investment of $100,000. The resulting benefit would be akin to that of a full traditional long-term care policy.

You could pay substantially less for a lesser benefit amount (as we did), just as you might do with a long-term care policy so don’t let that initial investment amount deter you. They found that:

Policy A would pay a Death Benefit of $193,906
Policy A would pay a monthly long-term care benefit of $8,079

Policy B would pay a Death Benefit of $150,121
Policy B would pay a monthly long-term care benefit of $6,255

Policy C would pay a Death Benefit of $165,997
Policy C would pay a monthly long-term care benefit of $5,533

Some advisers warn against this choice as you lose the opportunity to get market growth rates on a large lump sum of money. Eleanor Laise of Kiplinger notes that “If you put $200,000 into a hybrid product and interest rates go from today’s near-zero levels to 6%, the product is actually costing you $12,000 a year.”

She then quotes Michael Kitces, director of research at Pinnacle Advisory Group who warns in such a situation that it then becomes, ” the most expensive long-term-care insurance policy in the history of long-term-care insurance.”

On the other hand, the market could go into the tank, taking any lump-sum investment with it—making you look like one of the most financially savvy individuals in the nursing home.

Certainly, it may not be the perfect solution for everyone as it generally does require a lump sum payment up front and you still have to qualify medically. However, it does provide an option that can be “win-win” in that you can either use it for long-term care or your heirs are returned every penny you invested and then some. What’s more, you’ll never see a premium hike.

Wouldn’t it be nice if all auto and health insurance policies did the same?

Summary

If you’re considering long-term care insurance as you begin your journey along the gray mile, you need to know your options—and whether you can even qualify. By studying your options, you can make a plan. And keep your fingers crossed that it is the right one for you.

Tom Text

@TomJonesNBTX

 

 

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