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Should You Buy Long-Term Care Insurance?

The numbers can seem alarming: According to a 2016 Department of Health and Human Services study, about half (52 percent) of Americans turning 65 today will require long-term care services during their lifetimes, with about 12 percent needing between two and five years of long-term care and nearly 14 percent (1 out of every 7 adults) requiring five or more years.

For women, the numbers are even more concerning:  nearly 6 out of 10 will need care (versus fewer than 5 out of 10 men).  For those who do develop a disability and need care, the average length of care is 4.4 years for women and 3.2 years for men.

Even more scary to contemplate are nursing home costs:  According to annual national surveys by the insurance company Genworth, the national median cost of a semi-private nursing home room is roughly $86,000 per year, or $236 per day. However, that cost varies widely by state and even within states.  In New Jersey, the median cost is about $120,000 per year ($329 per day).  In Texas, by contrast, the annual cost is around $55,000 ($151/day).

Given those grim statistics, and costs that could swiftly deplete a lifetime’s worth of savings, should you buy long-term care insurance?

A Closer Look at the Risks and Realities of Long-Term Care

While the phrase long-term care conjures up images of nursing homes, it’s important to understand that such care provides a wide range of services in a variety of locations, including at home, for those who are chronically ill, meaning that they need help with activities of daily living (such as dressing, bathing, or eating) or require substantial services to protect them because of cognitive impairment (e.g., Alzheimer’s).

It’s also critical to understand that most long-term care takes place at home, either informally (unpaid) by family members or more formally with paid homemaker services or home health aides.  Other options for long-term care include adult day care and assisted living facilities.  All of these are far less expensive than nursing home care. 

For example, a 2005 National Institutes of Health Study concluded that approximately two-thirds of average long-term care would take place at home, with most of that unpaid informal care.

Nevertheless, the 2016 HHS study concluded that while most people with long-term care needs will spend relatively little on their care (because of programs such as Medicaid and family care), about 1 in 6 (17 percent) will spend at least $100,000 out-of-pocket.

As Clint Eastwood famously said in the movie Dirty Harry, “You’ve got to ask yourself one question:  ‘do I feel lucky?’”

Three Problems with Long-Term Care Insurance

Long-term care insurance was designed to help families protect their assets from the high costs of long-term care by paying reasonable, level premiums over many years.  It hasn’t worked out that way.

Problem #1:  It’s Expensive

A recent insurance company premium quotation for a healthy, 61-year-old husband and wife residing in New Jersey is instructive:  The policy offers a $6,000 monthly benefit (about $200/day) for three years, for a total benefit of $216,000.  It includes 3% compound inflation protection and a 90-day elimination period (essentially a deductible of about $18,000 before benefits kick in.)

The cost?  About $2,300 per year for the husband, and $3,800 for the wife, or $6,100 per year.  If the couple live for another 25 years, they’ll potentially pay $150,000 or more in premiums.

On the other hand, just one year of nursing home costs could easily match or exceed that $150,000.

Problem #2:  Prices Are Skyrocketing and Insurers Are Fleeing

For many of the roughly 7 million people who currently own a long-term care policy, premium rate increases have been dramatic, sometimes nearly doubling policy costs.  While rates generally can’t be increased for individuals, they can be increased for a class of policy holders if an insurance company can persuade state regulators that the increases are needed.

Insurers are asking for the rate increases because they frequently underestimated how long their customers would live, how long they would have to pay claims, and how often policies would lapse.  Compounding those problems are the low interest rates of the past decade, which have decreased insurers’ earnings on their reserves. 

The result has been a sea of red ink for companies that issued long-term care policies and an exodus from the market for many carriers.

Policy holders, meanwhile, must choose among three uncomfortable options:  pay more for their insurance, reduce the benefits, or cancel the policy and accept a small amount of paid-up insurance generally equal to the premiums they previously paid.

Problem #3:  You’ll Probably Never Use It

According to the American Association for Long-Term Care Insurance, the lifetime chance for someone buying long-term care insurance with a 90-day elimination period at age 60 and using policy benefits is 35 percent.  So about two-thirds of people who buy this insurance will never use it.

On the other hand, we’re far more likely to need long-term care than to have a car accident or experience a house fire, yet we pay premiums every year for home and car insurance.  

Don’t Look to Medicare, Though

Medicare is not designed to pay for long-term care costs and offers very limited benefits, up to a maximum of 100 days for each stay in a skilled nursing facility.

Specifically, Medicare will pay limited benefits for a nursing home stay only if you have been in the hospital for at least three days within the previous 30 days. Moreover, Medicare pays for skilled nursing care only, not for custodial or intermediate care, and it pays for coverage only in Medicare-approved facilities.

Should you qualify for this limited coverage, Medicare pays 100 percent of the costs for the first 20 days.  For the next 80 days, you face a coinsurance payment of $167.50 per day (in 2018).  Beyond 100 days, Medicare pays nothing.

The bottom line:  you can’t rely on Medicare for long-term care costs.

Medicaid:  Tough Medicine

Medicaid pays for about half of all long-term care costs in nursing homes.  To qualify for Medicaid, though, you generally must spend down your countable assets, which are usually limited to $2,000 for a single person or $3,000 for a married individual, and have very limited income.

Countable assets don’t include your home, a car, and various other assets. Moreover, income and asset protections exist for a spouse who is not institutionalized.  That said, you generally must exhaust most of your non-excluded assets to qualify for Medicaid.

Even then, you may find it difficult to find a Medicaid bed in a nursing home, or be required to take the next available bed in a facility that is not your preferred one.

So When Does Long-term Care Insurance Make Sense?

All choices for funding long-term care—whether family care, self-funding, private insurance, or Medicaid—come with advantages and drawbacks.  One way to think about a way forward is to consider two critical factors:  your age and your assets.

In terms of age, long-term care insurance is best purchased sometime in your mid-fifties to early sixties.  This strikes a balance between minimizing the number of years you’ll need to make premium payments versus keeping the costs reasonable, since the older you are when buying the insurance, the higher the premiums.

In terms of assets, if you’re wealthy enough to fund the cost of long-term care over several years, you probably don’t need to worry about long-term care insurance and may be better off investing the money you would have paid in premiums.

On the other end of the scale, if you can’t afford the insurance premiums, you’ll probably need to rely on family, friends, and, ultimately, Medicaid.

Those in the middle, who can afford the premiums and want to protect their assets and families from the risks of long-term care costs, are most likely to find some form of long-term care insurance worthwhile.

Personal Factors Also Come into Play

Your individual likelihood of needing long-term care depends in part on personal factors, such as your current health and behavior (for example, exercise, smoking, drinking).  Your family’s history of longevity also comes into play, since the longer you live, the more likely you are to need long-term care at some point.  A family history of disabling diseases such as Parkinson’s, or of dementia, also must be considered.

Alternatives to Traditional Long-term Care Policies

In attempt to address the current problems of long-term care policies, insurers in recent years have introduced hybrid polices, such as those that combine life insurance with long-term care insurance.  Under such a policy, if you need long-term care, you can draw benefits during life.  If long-term care is never needed, your beneficiaries receive the death benefit.

Other possibilities include combination annuity/long-term care contracts, accelerated benefits from a traditional life insurance policy, or riders that allow conversion of a disability insurance policy to a long-term care policy.

In the end, careful analysis, planning, weighing of alternatives, and consideration of your personal circumstances are essential in determining the optimal solution to this complex financial planning problem.

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