Monday, December 2, 2013

A Skeptic's View of Long-Term Care Insurance

A Skeptic's View of Long-Term Care Insurance

Bert Whitehead, M.B.A., J.D. © 2013

Recently an elderly client asked me whether she should purchase Long-Term Care (LTC) insurance. Her neighbor who sold this insurance often mentioned the importance of this coverage, particularly since my client's spouse had died and she didn't want to "ruin her daughter's old age" by having her daughter become her caretaker.
LTC insurance policies are designed to cover the costs of custodial care for an elderly or disabled person who becomes so frail that they need help with at least "two activities of daily living," such as bathing or eating. These policies appeal to people who have no one to care for them, or who do not want to burden a spouse or children if they cannot care for themselves.

These policies are aggressively sold because insurance sales people generally make higher commissions on LTC insurance than any other policy. Moreover the annual premiums have increased so much over the past ten years that people who bought policies then cannot afford the policies now, or have to agree to reduced coverage. Premiums can increase continually without a ceiling.

Insurance companies have vastly underestimated the costs of long-term care benefits; even the government dropped long-term care in the Affordable Care Act because it was determined to be too expensive. Faced with rising life expectancies and increasing costs for medical care, more than 100 insurance companies have stopped offering LTC insurance during the past ten years. It’s difficult to determine the strength of insurance companies that continue to offer these policies.

In my experience, LTC insurance is over-priced and often sold to people who don't need it. The worst part is that when people have to use it they’re more likely to feel frustrated, disappointed and dissatisfied than to enjoy the comfort and peace of mind they expect.

Claims for benefits are routinely challenged by insurance companies, and policy holders are often determined to be ineligible for benefits based on the fine print in their policies. People who make the claims are saddled with an overwhelming continuing administrative task as companies require more and more documentation to support claims.

Who Needs It?

It is better to self-insure yourself whenever you can. Insurance companies are like casinos: they know what the odds are, and simply adjust their payouts to assure profits. LTC, however, is a relatively new offering. When I grew up, my grandmother went to the county hospital when she became senile -- nobody considered LTC insurance. So our generation is the first to face this issue and insurance companies don't have enough experiential data to price it. Since life expectancy has risen so fast, and medical technology and expense have mushroomed, companies selling LTC have had to continually scramble to raise prices, reduce coverage and, of course, contest claims.

One of the reasons LTC is relatively costly is that sales people are paid higher commissions to sell it than any other non-investment insurance policy. Policies are sold aggressively and are very difficult to compare. The primary components of a long-term care policy are the daily benefit rate, the length of coverage, and the level of inflation coverage. Sales people are paid higher commissions based on the various options they suggest and sell. 

If you select $250/day coverage when you are 55, the cost would be $2,065 per year and would cover benefits for 3 years. Even ignoring the reality that premium costs will rise faster than the inflation rate, from the start this policy would create a "pool" of only $273,750.

Let's face it: if you end up in a nursing home, you're not going anywhere else. Right now if you live within your means and save 10% a year (even after retirement), you may well have enough to self-insure. Certainly those with $1 million in financial assets (or $2 million for a couple) should be able to self-insure.

Fifty percent of Americans who have less than $250,000 in financial assets probably can't afford the luxury of LTC. You will have to make do with Social Security benefits, Medicare and Medicaid if you qualify. So let's consider those with more than a $250,000 but less than $1 million in total assets who are over age 60.

What are your chances of needing LTC?

  • ·         Insurance sales people stress that two-thirds of people age 65 will need LTC in their lifetime.

  • ·         A nursing home can cost more than $70,000 per year.

But what they don't tell you is:

  • ·         More than 70% of seniors will have less than $25,000 in private out-of-pocket expenses for nursing home care during their lifetime.

  • ·         Only 5% of seniors will need to pay $50,000 or more per year for long-term care for more than 5 years.

If you are considering LTC:

There is impartial information available online, e.g. Long-Term Care: What Are the Real Risks?  If you currently have an LTC policy, have it reviewed by a fee-only financial advisor before you cancel it.

Keep in mind that policies generally cover only three years of nursing home care and older policies that covered up to six years are seldom available any more. There are also options to convert current life insurance policies so that they can serve double duty and provide LTC insurance if that is needed. If you decide you need LTC, check your life insurance policies to see if they are convertible. 

Thanks to Shari Cohen and Laura Webber for editing