Should I Purchase Long-Term Care Insurance?

A 55-year-old friend, Jen, recently asked my opinion about long-term care insurance. Very few Americans, about eight percent, have long-term care insurance policies. Jen, who is at the age when many are weighing the pros and cons of long-term care insurance, had thought about buying a policy but didn’t feel like she had the money to do so. Recently Jen received an inheritance, as Muriel, her mother, passed away at age 87. Now Jen has the funds to pay for long-term care insurance (LTC) but is having second thoughts about it based on her experience with mom. Muriel had purchased LTC insurance when she was 64 years old, declaring she never wanted to be a burden to her grown children and hoping to spend her twilight years at home with the policy paying for any skilled assistance she might need. The policy would also have paid a portion of the fees for an assisted living facility if that were required.

As it turned out, Muriel was able to live independently in her own apartment until just a few weeks before she passed away (from complications related to pneumonia), never using her benefits. Her LTC policy had a short waiting period of 20 days before benefits would have started. However, she had only one day at home with skilled care which she paid out-of-pocket. A longer waiting period of 60 – 90 days would have reduced the premium and is one of the factors to consider when purchasing a policy.

Jen estimates her mother spent approximately $63,066 in premiums over a 23-year period, which provided her with peace of mind, and would have been immensely helpful if she had been a long-term care patient for more than a few months. In her geographic region, assisted care ranges from $1,200 – $9,000 per month and averages $4,653 per month. So, if Muriel had moved to an assisted living home her benefits paid would have equaled the premium paid in a little over a year.

The length of time that Muriel needed care was far below average. Average “length of stay” is a carefully tracked industry benchmark in the annual State of the Senior Housing Industry report released by the American Senior Housing Association (ASHA). For those that end up needing care, the average length of stay in an assisted living facility is about 21 months (based on 2008 data).

Here are the questions and ensuing discussions Jen and I had about the pros and cons of purchasing long-term care insurance

Questions I asked Jen

Are you healthy? What is your family’s health history?

Jen exercises regularly, maintains a healthy diet, weight, and lifestyle, has annual check-ups and skin checks, and gets her teeth cleaned twice a year. While there is a history of heart disease (stroke and arteriosclerosis) in her family and three of her grandparents passed away between the ages of 45 and 65, Jen’s father is still healthy at age 91 and, as we noted, her mother passed away quickly at age 87. Somewhat counter intuitively, someone like Jen – who maintains a healthy lifestyle and will probably live a long life – may be more likely to need long-term care compared to those who are unhealthy and will not, as a result, live as long. One of the benefits of long-term care insurance is it can allow you to stay in your home and maintain independence longer (as Muriel intended). Policies require you to need help in two of the six Activities of Daily Living (ADL) before the benefits are activated (after the waiting period, of course). These six areas are eating, bathing, dressing, toileting, walking, and continence.

Will your children take care of you if you are unable to live alone?

It didn’t take Jen long to answer this question. Her children are in their early 20s. They have just started “adulting,” Jen’s daughter’s word. Their economic future is uncertain and there are countless unknowns. And, like Muriel, Jen does not want to be a burden on her children in her later years. One of the primary reasons people buy long-term care insurance is because it enables you to pay for professional care so your family is not saddled with this task.

Questions Jen Asked Me

What are the odds I’ll need long-term care insurance?

I wish I knew. According to statistics from the American Association of Long-Term Care Insurance, “the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older.” Knowing Jen’s medical and family history, I would hazard a guess that her odds are much lower. But I don’t have a crystal ball (except for the paperweight on my desk). For Jen and everyone else, I can safely say, “you will need care or you won’t.”

What I do know, though, is that if you need care for more than a few months (either at home or in a senior facility), you’ll be glad you have long-term care insurance. Those funds will be accessible to you, whether you’re 65 or 105.

What about Medicare?

After she turns 65, Jen will be eligible for Medicare. However, according to the U.S. Department of Health and Human Services, “Medicare only pays for long-term care if you require skilled services or rehabilitative care and Medicare does not pay for non-skilled assistance with Activities of Daily Living (ADL), which make up the majority of long-term care services.” And by the time Jen is eligible, there will be a glut of aging baby boomers needing care and it is likely that Medicare will be substantially different. So best not to depend on it for long-term care.

What about Medicaid?

If you qualify for Medicaid, it covers the cost of many long-term care services. However, to be eligible for Medicaid, you must have limited income and assets. In Arizona, where Jen lives, to be eligible for Medicare the maximum income you can have for a household of one is $15,800. Given Jen’s projected retirement assets, she will not be eligible for some time.

What are my LTC insurance options?

There are different levels of long-term care insurance, some are basic, some have more features. When it comes to the amount of coverage, you may not need a “Cadillac” policy. Policies, from company to company, are nuanced (even, not surprisingly, complex). It takes time and effort to parse out the differences related to costs and benefits.

Traditional long-term care insurance functions a lot like home and auto insurance policies. You pay premiums each year and then apply for benefits when the need arises. The risk – like home and auto insurance – is held by the insurance company. That is, the company could end up paying for many years of care after you’ve only paid one or two year’s worth of premiums. With traditional policies, the premiums can increase if a rate increase is requested and approved by the state’s insurance commissioner. For example, in 2013 Genworth requested an increase, which was just approved in Arizona in 2017. Now we are seeing our clients with Genworth policies experience a 30% rate increase. In another case of a rate increase, in 2013 CalPERS (California’s state public employees’ retirement system) raised rates by as much as 85% (!). In June 2017, a judge sided with 130,000 long-term care policyholders in a class action against CalPERS, permitting the case to proceed to trial. Not sure how that will turn out. (Note, CalPERS is not an insurance company and not regulated by the same rules as insurance companies.) What we do know is when inevitable rate increases happen, there are often ways you can tweak the benefits so your premium stays the same, but you reduce the total benefit it may provide.

Then there are hybrid policies that combine an annuity or life insurance with LTC insurance. The life insurance version offers a death benefit and allows you to access that death benefit early if you require long-term care (as defined in each particular policy). You withdraw funds from the policy when they are needed for care, and, in some cases, an additional benefit rider ensures that the insurance company pays for care when or if your portion of the funds are depleted. An advantage to these policies is that premiums are guaranteed to never increase. Moreover, if you never access the policy, premiums that funded the policy are returned to heirs either in the form of a death benefit or cash value.

Another option to consider is purchasing a “permanent life insurance” policy with a critical, or chronic, care rider. These riders don’t always cover everything a traditional long-term care policy will cover, so be sure to read the fine print.

My Advice to Jen

I advised Jen to consider her sources of income from her retirement savings. After she retires at age 67, Jen will live off Social Security payments and withdrawals from her two million of retirement savings. I told Jen she has enough assets that likely she would be able to pay for care out-of-pocket, which means she would be self-insured. If she goes that direction then until she needs care, she can continue to invest her funds earmarked for LTC. But Jen is decidedly risk adverse and she may feel more secure shifting the risk to an insurance company. By purchasing a policy she would know her care needs are taken care of. Yes, she may end up spending money on insurance that may not come back to her – but that’s the fundamental concept of insurance. You don’t really hope your house burns down or get in a car accident so you can use the benefits, do you? Of course not!

For Jen, if she wants peace of mind, I’d say give LTC insurance serious thought.