Are you considering buying long-term care insurance? Think again. It would likely be a waste of your money.
Insurance decisions are often clear.
Do you need health insurance coverage? Yes!
Do you need disability insurance? Yes, if you depend on your work income.
Do you need life insurance? Yes, if you have children or other dependents.
Long-term care insurance may or may not make sense for you.
An Issue Close to Home
My father went into a nursing home a couple of years ago. I was confronted with the stark reality of human frailty. In my mind at least, my Dad was always a large, strong, independent man. His progressive neurologic disease ravaged his life and forced him into institutional living.
Unfortunately, this isn’t a rare story. About two-thirds of us will need long-term care. This can contribute to our fears of running out of money.
It is common enough that many of us should insure against this catastrophe.
Trends Pushing Against Us
The need for help with long-term care is common and expensive. Several factors converge to make this a fearful proposition. Diseases are shifting from acute to chronic. We are less likely to die during childbirth or from smallpox. Bigger threats are cancer, diabetes, and hypertension.
A Downside of a Long Life
Longevity continues to increase. We live longer, but may not physically be able to do what we would like.
Fewer to Provide Help
Family sizes have decreased. My grandmother had a dozen siblings to help share the burden of caring for aging parents. She had only three children. That pattern is consistent through time and across the country. Fewer helpful children mean more institutional and professional caregivers.
I’m Out of Here Mom
We are a more mobile society. My relatives were all concentrated in and around New England two generations ago. Now we are across the country. How many children even live in the same state as an aging parent, let alone the same town? Who has time to take out of their own work and life let alone become an elder caregiver?
If your children are plentiful and nearby and able to help, you are in the fortunate few. But still, do you want to place that burden on them? What are your other options?
We buy insurance to help limit financial losses from catastrophes. That is the whole point of insurance. So maybe we should insure against this likely outcome.
Reasons to Buy Long-term Care Insurance
We insure against less common and less costly events. Here are some examples, based on figures quoted by Sue Stevens.
Risk: House fire
Average cost: $3,400
Frequency 5 out of 1,000
Risk: Car accident
Average cost: $3,000
Frequency 70 out of 1,000
Risk: Nursing home stay
Average cost: $270,000 (90K x 3 years)
Risk: 600 out of 1,000
No Empty Nursing Homes
Statistics show 70% of those over 65 will need long-term care. Odds are high for a married couple over 65 that one or both will need help at some point. Currently, 1.4 M Americans are in nursing homes. This isn’t a tiny issue.
At annual costs approaching 100K per year, you can be wiped out in short order. Plus, costs are rising.
“Be nice to your children. After all, they are going to choose your nursing home.”
Uncle Sam Won’t Help
Don’t look to the federal government to help you out. Medicare covers up to 100 days of a hospital stay. Beyond that, forget it. You are on your own. It is your tough luck if you can’t go home and take care of yourself anymore.
Stuck in The Middle
It is easy to argue that the middle class needs this insurance. If you are late-middle age and approaching retirement, you may want to consider it.
If you are in the middle and can afford it, go for it. Be sure to understand what you are buying. Also realize, costs and denial rates go up as you get older.
Consider This Cost Before FIRE
Let’s say you are 60 years old and in good health with $1M in assets. Your portfolio will likely produce enough income to cover basic living expenses. You may feel you are in a good financial situation.
You may even consider jumping on the FIRE (Financial Independence, Retire Early) bandwagon. But remember, paying $93K per year for a nursing home could wipe out your decades of savings.
Did You Provide Well Enough?
And what will happen to your spouse after you spent the family fortune on your long-term care? This could happen and often does. Especially when the breadwinner is male.
He may feel they have plenty of resources, but after long-term care expenses, there may not be much left. Women tend to outlive men. And they are three times more likely to end up in a nursing home. How will the surviving spouse pay?
I bet you are terrified. Ready to buy?
Hold your horses! You may want to reconsider!
Reasons to NOT Buy Long-term Care Insurance
Disability is measured in how many Activities of Daily Living (ADL) a person cannot do. ADLs are the activities we do daily without even thinking. Things like brushing teeth, showering, or getting dressed.
A lot of nursing home residents need help with much of their self-care. Those are the examples in our mind when fearing the dependence of life in a nursing home. Of paid care, less than 20% is for nursing homes.
Although 2/3 of us may need help with long-term care at some point, many of us will need help with only 1 ADL. Those folks get thrown into the mix of long-term care statistics.
You May Need Some Help
Having trouble with one ADL doesn’t have to spell doom or life in an institution. Often a family member could help with that one activity. They can do so at home and for free. This is done every day throughout this country. Estimates are that 80% of care is informal and unpaid home care.
Stays are Short
On those needing help with ADLs, 37% will need assisted living or nursing home. The majority of nursing home stays are 90 days or less. You would be in and out before your long-term care insurance even kicks in. 90-day elimination periods are common.
The longer stays in nursing homes are the most expensive. Fortunately, 95% of nursing home stays are less than 2 years. Three-fourths are less than 1 year, especially for those who enter over age 75.
Our Biggest Fear
The worst and most devastating scenario would be a prolonged nursing home stay. That fear drives the entire long-term care insurance industry. It is likely the only reason you are reading this.
Take solace in this beautiful fact: Only 8% will incur a nursing home stay of five years or more.
Insurance is Expensive
Good policies are expensive and need to be in place before age 60. Somewhere around age 60 may be a sweet spot for purchasing long-term care insurance. You will pay for decades and there are exclusions galore.
Affordable insurance can be purchased in your 50s. Just realize you likely won’t use it until your 80s. Or your 70s, at the earliest. That becomes a multi-decade expensive gamble.
You May Stop Paying
Do you want to pay in for years or decades? Furthermore, premiums are likely to rise by 10% to 25% during the life of the policy. Many buyers call it quits. Because of cost, 10% of policyholders drop their long-term care insurance plan in the first year.
Insurance is Complicated
Be informed. Understand exactly what you are buying and what you are not. Don’t rely on the brochure or salesperson. Take a deep dive and know your stuff. Understand terms like benefit triggers, advanced death benefits, elimination periods, and daily benefits.
Review the conditions for non-cancellation, inflation protections, benefit payment periods, and disease exclusions. Special riders may apply for home care, Alzheimer’s, or adult daycare.
Costs Are Unclear
The pricing is complicated. The cost of term life insurance is driven by only age and health. Not so with long-term care insurance premiums. They depend on many factors. Some of these are, according to the book, “The 7 Secrets of Extraordinary Investors”:
- Your age and health
- The state you live in
- Benefit triggers
- Daily benefit
- Length of benefit
- Length of waiting before benefits start
- Whether you buy inflation protection for the daily benefit
- Whether you buy a waiver of premium which allows you to stop paying premiums when the benefits begin
Payouts Depend on the Company
The insurance company will likely raise rates and may be out of business by the time you need it. Even some highly-rated financially-solid institutions got wiped out in 2008. That could happen to your insurer right when you need the payments.
You Won’t End Up on The Street
You won’t be on the street without long-term care insurance. If you are poor or become poor, you will qualify for Medicaid. Medicaid is the safety net. Medicaid is funded by state funds and covers basic nursing home costs.
Unlike Medicare, it covers housing costs. And there is no limit on the duration of coverage. Those costs will be covered for life. This is not a small program. Medicaid covers half of all nursing home residents in the U.S.
Medicaid Saved My Dad
If you are poor -as my aging father was- long-term care insurance makes little sense. He qualified for Medicare and Medicaid coverage. He had no assets to lose and never could afford a private insurance plan.
Insurance is Hard to Get
Depending on your age and health, you may not qualify. 10% of applicants in their 50s are denied. Those rates double with each decade (20% in their 60s, 40% in their 70s).
Insurance May Not Pay
The average total payout of long-term care insurance claims was $48K. Hardly the devastating figure you have been told. And that doesn’t count all the zeros out there. Nor the denials. 25% of claims are denied.
Not a Good ROI
Long-term care insurance can provide some security, but it is not an investment. Long-term care insurance money will be gone if you don’t use it, unlike life insurance which is guaranteed to pay. Odds are high you will never collect much if anything from a long-term care insurance policy. Most never need a long-term intensive high-cost stay.
Any Return is Delayed
Even if you do get some money back, it won’t be for decades. You may pay premiums for 20-30 years. Two-thirds of claimants are in their 80s and 25% in their 70s.
The cost of insurance makes financial sense in very few scenarios. Chances are you won’t live through one of those scenarios.
Build Wealth and Self-Insure
If you are rich you have the option of being “self-funded.” That is, you could cover the costs without being devastated. You will have more control over how much you spend, when, and why.
Physicians who earn, save, and invest over a lifetime will have millions by age 65. They may not need this insurance.
If you have $3-$5M you likely won’t need to insure against this risk. Spending 2-3 years in a nursing home would not break the bank. Besides, you likely would want to pay for more comfortable arrangements.
Things to Know When Buying Long-Term Care Insurance
There may be other ways to get some insurance protection. Coverage can be combined with annuities or life insurance. You may be able to add an Advanced Death Benefit (ADB) rider to an existing life insurance policy.
The benefit period is the length of time there is coverage. Unlimited is very expensive. Reducing it to 3 – 5 years lowers costs without adding much risk since few will exceed that length of stay.
Pick the Insurer Carefully
It may be worth working through a reputable insurance agent. If not, you should at least do some due diligence online. Check out the insurance company’s financial strength. Companies rated ‘A’ by AM Best are recommended.
Is Long-Term Care Insurance Right for You?
Near the end of your career as a member of the “mass affluent” consider buying long-term care insurance. If you think you won’t be destitute and you won’t have several million bucks, then get long-term care insurance.
Do your homework, understand the policy options, and see what works for you.