The chance that you may need some form of long-term care during your life is much higher than the chance of your house burning down. But does that mean that you should buy Long Term Care Insurance ?
Recent figures from the U.S. Department of Health and Human Services show that nearly 70% of people turning age 65 today will need long-term care at some point. The problem, however, are the big unknowns: how long will you need it, as well as the solvency of the insurance company when you do. So it’s not a matter of if, but of when, and how long. It’s all about risks and costs, and both of these are unknown with long term care.
Thousands of baby boomers are now retiring every day and discovering that a Long Term Care (LTCi) policy is beyond their budgets. For example, a typical policy with reasonably good coverage for a mid-50s couple might be in the range of $4,000-$5,000 per year. 30% increases per year are not uncommon for newly issued policies, but existing policies can also have their premiums increased as long as the rates are increased for an entire class of existing policyholders.
More than a decade ago the premiums for LTCi were much more reasonable. The insurance companies mispriced their policies and were charging premiums that were too low to cover their future claims. They also expected a large percentage of policyholders to lapse their policies and stop paying after a few years, and this didn’t happen.
If you hear friends and colleagues sing the praises of the LTCi policy they purchased 10 years ago, rest assured that you can no longer buy these types of policies with unlimited benefits or limited payment periods today. People who bought LTCi over the past 10-15 years got an incredible deal compared to what similar coverage costs today.
The Unfortunate Truth About Long Term Care Insurance
The central problem with long term care insurance today is that because premiums are so high, if you can afford to buy it, you probably don’t need it because you also have sufficient assets to self-insure. Likewise, people who really need it, usually can’t afford it.
The people who really love long term care insurance are the financial advisors and insurance agents who receive large commissions from selling these policies, since the commissions are very lucrative. A typical commission could be 100% of the first year premium, and then 2%-5% per year of your premium payment for as long as you keep paying for the policy.
For many people, a better strategy might actually be to simply save the money that would have been spent on premiums and just self-insure. If you have the financial wherewithal to pay $5,000 annually for 20 years before you need to make a claim, in your late 70’s or early 80’s, why not just save and invest this amount annually. In 20 years, there could be enough to help cover any health care related expenses.
Trying to decide if you should purchase a policy?
Here are some things to think about:
- Will the company even be there when you need them? These policies are not government guaranteed in any way. If the insurance company goes bankrupt in 10 years, you will be out of luck. You could end up paying the policy for decades and not receive any benefit when you need it.
- Can you continue to pay the current premium assuming potential increases, indefinitely? There is no guarantee that the premiums will not go up. Premiums for existing policyholders could increase dramatically in the coming years with each annual renewal. Before you consider a policy, consider whether you have the budget to cover large future premium increases of 25% or more.
- The difficulty of actually getting reimbursed for your expenses. Read the fine print, since there could be many exclusions as well as requirements for buying pricey state-licensed home care.
- The cost of healthcare is increasing much faster than the rate of inflation. If your policy does not include an inflation protection rider of 3%-5%, you are buying a lot less insurance than you think. Because the daily benefit of a policy is fixed, in 20 years that $200/day benefit may not amount to much. With inflation protection, your daily benefit will also grow every year. I always recommend an inflation benefit of at least 3%, and a “compounding” rate (think compounding interest) rather than a “simple” rate benefit which is just an annual increase based on the initial benefit.
- Are you in good health? The sweet spot for buying a policy is in your mid 50s, while you are still young enough to be in good health. Once you are in your 60s, you may no longer qualify due to health issues, and the premiums will be substantially higher.
- It’s insurance for a couple of years of care. After the limit on your policy is paid out, the coverage stops.
How to Design a Policy that Makes a Little More Sense
- Consider a 180-day elimination period instead of a 30 or 60-day period. Ideally, you want to insure against the cost of a long period of care, since you can self-insure for short periods. The elimination period is just like the deductible on an auto or homeowner’s policy, there is no coverage during the elimination period. This helps to lower the policy cost.
- Consider a higher daily benefit for a shorter benefit period. The total benefit of a LTCi policy works like a so called “pool of money”. For example, $200/day benefit x 365 x 3 years = $219,000. If you incur less than $200/day in expenses, you can continue to collect benefits until this total amount of the “pool” is exhausted. For example, compare the costs of a $200/day benefit for 3 years instead of a $150/day benefit for 5 years.
Charles W. Malsbury is a fee-only fiduciary financial planner. Since I do not sell insurance or receive any kind of commission, I provide my clients with unbiased recommendations on the Long Term Care Insurance decision. Contact me Here.