Should You Buy Long-Term Care Insurance, or Invest and "Self-Insure"?

If it's the last week of the month, odds are Alison Southwick and Robert Brokamp are going to amble over to the Motley Fool Answers mailbag to find out what it is their listeners really want to know. And for added gravitas and expertise, they've brought in reinforcements: Naima Barnes, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool.

In this segment of the podcast, they weigh the options for a listener trying to decide whether or not to buy a long-term care insurance policy. Given the high cost of such care, and how often people require it, the answer might seem like a no-brainer. Unfortunately, that very fact led to issues that have changed the calculus around these plans -- both for the buyers and the sellers.

Naima Barnes is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional.

A full transcript follows the video.

This video was recorded on May 29, 2018.

Alison Southwick: The next question comes from Pete in Phoenix. "I've got a question about alternatives to long-term care insurance. I know there's a range of options out there, but the premiums can be relatively high, especially if you factor in an inflation adjustment and do away with the five-year limitation on benefits. I know you need insurance for the unexpected, but I hate the idea of paying hundreds of dollars a month well into retirement.

Would it be better just to sock that premium money away in an IRA after maxing out my employer's 401(k)? Assuming I have my home paid off in retirement and a decent payout from my other investments, would it make sense to use this 'long-term care' IRA as an old-age emergency fund and as an alternative to long-term care insurance?"

Robert Brokamp: Long-term care insurance is a tough one. Let's start with whether you're going to need long-term care. If you go to [LongTermCare.acl.gov], they have some good stats. The stats are that you'll need some type of long-term care, probably. It also shows that the majority of that long-term care is in-home care, so you'll need help with some kind of shopping, cleaning, bathing, and stuff like that.

Roughly speaking, anywhere from one-quarter to one-third of people will need some sort of facility care, so you're talking about a nursing home, and that's where people get very concerned, because on average [it varies where you live], a nursing home costs $8,000 a month. A large amount of money. So, it's in those situations where people get scared. On average, people stay in a nursing home about a year, but a good percentage of them [around 20%] stay for more than three years and the chances that you'll go into a nursing home and stay there longer increase if you're a woman because you'll be living longer. That's a factor to consider.

Given those odds, a lot of people think, "Well, of course, long-term care insurance would make sense." The problem is, first of all they are expenses, so if you're in your fifties or maybe early sixties, it's going to cost you $3,000 to $3,500 a year. Now, what you'll be told is that that's all you have to pay.

Unfortunately, the history of long-term care insurance over the last 10 to 15 years is that many companies underpriced their policies and had to come back to policy owners and say, "Actually, you have to pay more. Either you have to pay more, or we have to reduce your benefit," and this happened just recently. One of the last holdouts was MassMutual in terms of raising premiums on people, but now they need to raise premiums about 77% on 54,000 policies.

Because of these problems, people are getting out of this industry. At its peak in the early 2000s, there were more than 100 insurance companies offering long-term care insurance. Now, there are about 12, because they underestimated how much it was going to cost to pay these out. They underestimated how long people would keep these policies. Insurance companies always factor in the odds that people just won't pay their premiums anymore. And low interest rates, which can be devastating to insurance companies because they invest most of their savings, or the premium money, in bonds and things like that.

So, should you get long-term care insurance? Generally speaking, I like your idea, actually, of being able to self-insure. Save enough money. I love the idea of you calling it -- what did you call it? -- your long-term care IRA. There is no such thing, of course, but just mentally you're thinking this is the money I may need for long-term care. Also, with the house paid off, you can use home equity to pay for a lot of long-term care, especially in-home long-term care. You can get a reverse mortgage, pay for someone to come in and do some of the services you need.

Now, if you get a reverse mortgage and then have to go to a nursing home, then you have to pay back the reverse mortgage, but it's still, I think, one way to think about home equity in retirement as that big, fat emergency fund that could cover long-term care and expenses if you need it.

Southwick: There's no easy answer for long-term care insurance.

Brokamp: There really isn't, and when you think of life insurance, when you get a life insurance policy, it's pretty efficiently priced. If they tell you it's going to cost you $500 a year, you can be pretty sure that's what it's going to cost you. You don't have to worry about any sort of future increases. But long-term care -- the history is that's just not been the case.