The Issue of Long-Term Care Insurance
By David Braze (TMF Pixy)
In the last two articles we've looked at long-term care definitions and how Medicare and Medicaid may pay for the costs of needed long-term care services. Now it's time to turn our gaze to the issue of long-term care insurance. Given the potentially devastating costs of a nursing home and our reluctance to deplete the family coffers, long-term care insurance may be the answer to our problems. Certainly the insurance industry would agree, as would many closely involved with providing the services associated with long-term care. Yet, at least to these eyes, the answer just isn't clear enough for me to say that insurance is appropriate for everyone. And I'm not alone in that regard.
The United Seniors Health Council, a nonprofit consumer organization devoted to the issues of the elderly, maintains that long-term care insurance is appropriate provided it costs no more than 7 percent of your retired income and:
- You have $75,000 or more per person in assets, excluding a home and a car.
- You have a retirement income of at least $35,000 per person per year.
- You can pay the premium without adversely affecting your lifestyle.
- You could absorb up to a 30% increase in future premiums if necessary.
USHC emphasizes those guidelines are not absolute because everyone's situation is unique, and I agree. Still, these rules of thumb seem to make great sense. After all, long-term care insurance is not 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. Due to costs, someone with fewer assets and a lesser income may easily find policy premiums a huge burden that significantly detract from a comfortable lifestyle today for a future expense that may not occur. (We'll talk about that next week.) 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. Yes, the kids would inherit less, but the parents would still be provided for during their lives.
At the opposite end of the spectrum is a retired couple with an annual income of about $75K and assets of about $1 million. In that case, I also have a tough time thinking insurance makes much sense. 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.
So who's left to buy this insurance? Those of us in that middle ground, that's who. Should we buy it? That's a personal decision that should be based on our own set of circumstances. This purchase is not as easy as the ones we make when buying life, home, and car insurance. Those are easy, particularly when it comes to comparing competing policies. That's not true regarding 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 for about 30 years. Today, about 120 companies write these policies, and only a few have done so for 20 years or more. Thus, their underwriting procedures and actuarial forecasts are not as reliable as those for other insurance products. That means the potential for unexpected and large premium increases is great, and indeed has already occurred in a number of instances. Additionally, these policies vary widely in terms of cost, what they cover, 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, until recently the industry has had a sorry record on benefit payments. In his book "Beat the Nursing Home Trap -- A Consumer's Guide to Assisted Living and Long-Term Care," author Joseph Matthews notes that for the decade ending in the mid-1990s:
- About 50% of all policies lapsed before benefits were paid.
- About half of policyholders who entered a nursing home never collected a dollar.
- When benefits were paid, they were far below actual cost.
Yes, things have improved since then, but caution is still in order. Thus, if you're in a shopping mode, 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. Certainly that person won't speak kindly of a competitor's policy, and sadly many agents don't fully understand the provisions of the policies they are selling. While the agent may mean well, that lack of understanding could mean the protection you thought you bought wasn't really included under the legal terms contained within the policy. Thus, recognize that you must do the comparisons yourself or hire a third party to do them for you.
Where do you start? I suggest you do some reading first. Due to space limitations, this series of articles barely scratches the surface of the issues involved. Therefore, I strongly commend the following readings to you ranked in the order of my highly subjective preference:
- Beat the Nursing Home Trap: A Consumers Guide to Assisted Living & Long-Term Care, available from Amazon.com for $20.85.
- Long-Term Care Planning: A Dollar & Sense Guide, available from the United Seniors Health Cooperative for $19.50.
- "Shoppers Guide to Long-Term Care Insurance," available free on request from the National Association of Insurance Commissioners, 120 West 12th Street, Suite 1100, Kansas City, MO 64105.
All make for sound reading from which you will gain necessary information to ensure you are better prepared for making decisions regarding the purchase of long-term care insurance. Most also contain worksheets you may complete in comparing the various products available for the type of coverage you may seek.
I can't and won't tell you to buy long-term care insurance. You have to decide that issue for yourself. But in making that decision, I recommend you do so from a strong knowledge base that can only come through some diligent research on your part.
Next: Those Dratted Statistics Made Easier »
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