Long-Term Care Insurance: Worth the Cost?

Insurers frequently lament that only 1% to 3% of those in the logical market for long-term care insurance actually buys that insurance. Their view is that most Baby Boomers are engaged in short-term thinking and that the nation will have a severe fiscal crisis as it tries to finance care for aging long-term Boomers.

Consumer Reports recently provided a different view, casting doubt on the policies and arguing that many people are wisely not purchasing long-term care insurance. CR‘s conclusion is that “long-term care insurance is too risky and too expensive.” CR‘s specific criticisms of long-term care policies are:

• Premiums are expensive and likely to rise. Eventually most people will be unable to afford the premiums. They will drop the coverage, losing any benefit from prior premiums paid and leaving them vulnerable at the time they are most likely to need the coverage. 
• Most policies will cover only a portion of the long-term care expenses incurred. Most people don’t understand that and don’t realize they still need other sources to pay for all of the care. 
• You might not meet the policy’s definition of covered care when receiving long-term care. Then, you bear the full cost of the care and must continue to pay premiums if you want the hope of coverage for future care. 
• The coverage won’t be needed for 20 years or more. (The average age of nursing home admission now is around 83.) There is no guarantee the insurer will be around to cover the policy when the need arises.

CR makes some good points, but it overstates its case. It as much as admits this by continuing the article, rating long-term care policies and giving advice to buyers.

Readers should follow the long-term care policy recommendations I’ve made in past visits and made elsewhere in this Archive. Here is a summary of my recommendations.

• Only the middle class really needs to consider long-term care policies. Those with few assets will qualify for Medicaid. They are better off using the premium dollars to pay their expenses now. Those with significant assets can cover their own long-term care expenses. 

  Give careful thought to not buying insurance if total assets are under $200,000 or over $2 million. These are not “hard numbers” because the cost of long-term care varies considerably around the country. In expensive urban areas, $2 million might not be enough wealth to self-insure.

• Consider other options. You can self-insure for part of potential long-term care costs and buy a policy to cover the rest. That reduces premiums. 

  Or you can plan to pay long-term care costs from your assets and buy a life insurance policy for your heirs to inherit in case the care depletes your estate. Life insurance is cheaper for most people than long-term care insurance. Also, life insurance, unlike long-term care insurance, is certain to pay benefits eventually. You also could have your children help pay for the long-term care insurance, under the theory that the insurance preserves the estate for them.

• If you do buy long-term care insurance, carefully select the key policy terms. These terms determine the amount of coverage and also the premiums. Be sure the daily benefit will cover the care in your area, or at least the portion you don’t want to self-insure. Adjust the waiting period or elimination period to the amount of time you are willing to pay out-of-pocket before the insurance kicks in. Extending the elimination period is an effective way to cut premium costs. 

  Shortening the benefit period (or lifetime benefit) also reduces premiums. Only a relatively few people need long-term care for extended periods. A benefit period of four years will cover most people. Be sure you have inflation protection (compound, not simple) since long-term health care costs are rising about 6% annually.

  Examine the covered care section closely. It should cover home, assisted living, and nursing home care. A prior hospitalization stay should not be required. Alzheimer’s and similar diseases should be covered. You want to be covered for both skilled nursing and custodial care. Home care should pay for things such as cleaning and cooking in addition to skilled nursing care.

Of course, you want to check the financial stability ratings of the insurers. There is no guarantee the ratings will be maintained 20 or more years from now, but it is what we have to go by.

In the March 2002 issue I explained how you can adjust these terms to make premiums affordable and the policy more effective. More strategies for policy-shopping were in the July 2003 issue. The articles are in the Health Watch section of the web site Archive.

A very difficult issue is the age at which to consider buying a policy. Insurers recommend considering purchase as early as age 40. They point out that premiums are very low, you could become disabled at any time (from a car accident, for example), and about 16% of those who wait until ages 60 to 69 have health issues that make it difficult to buy affordable long-term care insurance.

The case for waiting is that the policies, and long-term care, changed a lot over the last 20 years. Buying “too early” could leave you with an affordable but obsolete policy. Also, many of the early purchasers of long-term care insurance dropped the policies before getting any benefits. Buy too early and the policy will seem like an unnecessary luxury when money gets tight. It is better to buy when you are closer to needing the coverage but not so close that your health or the premiums prevent a purchase. Somewhere between ages 50 and 70 is when most people should seriously consider long-term care insurance.

For the record, CR gives its top ratings to policies from three companies: Physician’s Mutual, Farmers New World, and John Hancock. Premiums for a 65-year-old range from $3,520 at PM to $5,486 at Hancock. At age 70 the premiums were $5,414 to $7,279. Only policies available in California were considered, and the premiums are for California.