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
