Should You Buy Long-Term Care Insurance?

In the last two articles in my series, we defined long-term care and reviewed how Medicare and Medicaid might pay for those services. Today we'll see how long-term care insurance fits into the picture. Given the potentially devastating costs of a nursing home and a general reluctance to deplete the family coffers, long-term care insurance may be the answer to our problems.

Should we buy long-term care insurance? The insurance industry would say "yes," as would many folks who need or provide long-term care services. However, I just can't say that insurance is appropriate for everyone -- and I'm not alone in that regard.

Consumer Reports suggests that you skip long-term care coverage when:

  • Your net worth is less than $200,000, because you would soon be eligible for Medicaid should you need long-term care.

  • Your net worth exceeds $1.5 million, because you can afford to pay for that care yourself.

  • You can't afford the premiums, or won't be able to do so in the future should a sharp increase in premiums occur.

Conversely, the magazine suggests long-term care coverage might be appropriate when:

  • You are age 55 and have a chronic medical condition, or you have a family history of debilitating disease that may create a need for long-term care services in the future.

  • Your assets are between $200,000 and $1.5 million, and you must protect those assets for a spouse or other relatives.

  • You have no family member who is willing or able to take care of you.

Many financial planners generally echo these guidelines, saying that long-term policies may be appropriate for those with an income of at least $35,000 per person and an asset range of $300,000 to $2 million, excluding a home and car. Many go further by stipulating that premium costs should not exceed 5% to 7% of income.

While these guidelines won't fit all situations, as general rules of thumb they make great sense. Long-term care insurance isn't cheap. As with life insurance, the younger you are at the time of purchase, the cheaper it will be. But even then, the policy premiums vary widely in cost for seemingly similar coverage. Someone with fewer assets and a lesser income may easily find policy premiums a huge burden that significantly detracts from a comfortable lifestyle now in exchange for a future expense that may never occur.

In the lower income and asset ranges, even if the worst happened, long-term care costs would quickly deplete assets, enabling the resident to qualify for Medicaid anyway. That sounds bad, but in reality, the resident's spouse would still keep most of the marital income, the home, and a car. The kids might inherit less, but at least the parents would still be provided for during their lives.

At the opposite end of the spectrum lies a retired couple with an annual income of about $75,000 and assets of $1.5 million. I have a tough time thinking that insurance makes much sense for them, either. Both spouses could enter a nursing home, pay the costs involved quite comfortably for a number of years, and still leave a reasonable legacy for their heirs. Yes, a long-term care policy might help them leave a bigger estate, but so what? Again, the premium burden for something they may not need seems unnecessary to me.

That leaves those of us in the middle asset range to buy long-term care insurance. Should we? You'll have to make that decision based on your own personal circumstances. The decisions to buy life, home, and car insurance are easy ones, particularly when it comes to comparing competing policies. That's not the case with long-term care insurance.

Long-term care insurance is a relatively new product for the industry. In contrast to life insurance, which has been around for 200 years, long-term care coverage has only been available since the 1970s. Only about 100 firms sell these policies, and only one-third of them have done so for at least 16 years. Thus, their underwriting procedures and actuarial forecasts are not as reliable as those for other insurance products. Therefore, the potential for unexpected and large premium increases is considerable; it's already occurred in a number of instances. Additionally, these policies vary widely in terms of cost, coverage, and when they will actually pay. Consequently, they are exceedingly difficult to compare, particularly when it comes to all the bells and whistles with which they may be configured. Worse yet, until recently, the industry has had a sorry record on benefit payments.

In his book Long-Term Care: How to Plan and Pay for It, author Joseph Matthews notes the following statistics from the 1990s, the most recent period for which complete data is available:

  • Roughly 50 percent of all policies lapsed before any benefits were paid.
  • About half of policyholders who entered a nursing home never received a benefit from their policy.
  • When benefits were paid, they were far less than the actual cost of care.

Matthews notes that policies have improved in recent years, but caution is still in order. If you're shopping around, you will need to be an informed consumer. But please don't expect to receive objective, unbiased, or even knowledgeable information from the person who wishes to sell you that product.

Your agent certainly won't speak kindly of a competitor's policy, and sadly, many agents don't even fully understand the provisions of the policies they are selling. While the agent may mean well, that lack of understanding could mean that you don't end up with the protection you think you've purchased. You'll have to compare policies yourself, or hire a third party to do so for you.

Due to space limitations, this series of articles barely scratches the surface of the issues involved. Therefore, I strongly recommend the following readings:

They're all sound reads that will give you the necessary information to ensure that you're better prepared to make decisions regarding long-term care insurance. All cover the basics of long-term care and the factors to consider when deciding on such coverage.

I can't and won't tell you to buy long-term care insurance; you'll have to decide for yourself. Before you make that decision, I strongly recommend that you diligently research the question and arm yourself with as much information as possible.

Next: A look at those darn statistics.

Dave Braze is a retired financial planner who answers questions on theRule Your RetirementQ&A discussion board. is a Motley Fool Stock Advisor pick. The Motley Fool isinvestors writing for investors.

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  • Report this Comment On August 13, 2010, at 2:26 PM, pCissne wrote:

    First of all, you have to be healthy to qualify for Long Term Care coverage, no matter what Consumer reports says.

    I sort of agree with your stance that people with under $200,000 should rely on Medicaid as their primary Long Term Care planning tool. However, there is absolutely no reason for somebody with 1.5 million or more in assets not to protect themselves against the potential cost of Long Term Care. The cost today is about 75k per year, in 20 years, it could average 200k or more per year. Wealthy people do not need to worry about needing 1 year of care, that is not what will cause problems. What they need to insure themselves against is a looong stay in care. 4,5,6 or 10 years. Stroke, Alzheimer's, MS, Parkinsons are some diseases that come to mind that can cause a long physical and financial nightmare. What if you are one of the unlucky ones? If they need care in 20 years, what would that cost them out of pocket? Too much is the answer, because it could have been avoided. How would this affect the spouse? Would he or she be able to realize the same standard of living? How would your children feel about seeing their inheritance spent away? Sure they love you, but they have also planned on receiving that money. Your care could potentially create a conflict of interest.

    I understand that people do not want to pay for something that they may never need. Especially if it will cost your a few thousand dollars a year. However, the break even point for premiums paid, to benefits received is generally 6 months, depending on the plan you buy. Meaning that if you needed care for 6 months, you would have made your money back.

    Also, today there are more ways to protect yourself, other than just buying traditional insurance. Most recently, we have "Asset Based Long Term Care", or "Hybrid Long Term Care". This solution offers a person a way to reposition a portion of their assets and provide themselves with three benefits, as opposed to just one.

    1) Long Term Care benefits if you need it, 2) Life Insurance Benefit if you never need Long Term Care, 3) Return of Premium if you ever want your money back.

    This offers a way to give yourself protection, without risking your principle, your going to get back at least what you put in.

    "Yes, a long-term care policy might help them leave a bigger estate, but so what?"

    Are you serious with this comment? Come on!

    You could make the same argument for buying Long Term Care insurance. "Sure I paid premiums for 20 years and never needed it. I could have a bigger estate, but so what?"

    Respectfully, I think your argument is the same that many Financial Advisor's share. And the reason I think they argue this, is because they just don't want to sell it. Its a very long and difficult sale, there is tons of paperwork, you have to ask uncomfortable questions, and you can risk the relationship with your client if they were to be declined. Not to mention, it is much easier to sell a mutual fund or an annuity. I understand this, but it is no reason to overlook the potential cost in the future. If you don't want to sell LTCi yourself, outsource it to a qualified Long Term Care Agent. your putting your clients at too big of a risk.

    Most people are not aware of the options available, and you would be surprised how happy they will be when you introduce some options to them.

    This is all my opinion.

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