Long-Term Care Insurance
A Money Counselor reader (I’ll call him John) recently wrote to ask my opinion about long-term care insurance. John’s insurance agent had recommended it (surprise, surprise) after doing a “financial analysis.”
Pros and Cons of Long-Term Care Insurance
Long-term care (LTC) insurance is a challenging question. It’s expensive, but then so is long-term care. Surely many reasonable retirement plans have been wrecked by uninsured long-term care costs (not to mention the conditions making long-term care necessary!).
On the other hand, according to Forbes contributor Howard Gleckman, long-term care insurance is one of the worst insurance buys, returning just 68 cents in benefits for every dollar paid in premium. (You can see why insurance companies push the product!) But fear of a financially devastating long-term care need—even though the odds of such a need may be long and the payback on LTC insurance on average low—pushes many into purchasing a LTC insurance policy.
The Easy Part of a Long-Term Care Insurance Decision
This much is clear:
- If you’re likely to be eligible for Medicaid (not Medicare) in the future, don’t buy long-term care insurance. Medicaid will help with a big portion of any long-term care costs you may have. (Medicare will not.)
- If you are at least sort of wealthy, you’re better off self-insuring. Paying a premium for insurance to cover costs you could afford to pay for yourself is a waste of money.
And because John noted that his insurance agent’s financial analysis indicated that he should buy LTC insurance I’ll add this: Please do not blindly take an insurance agent’s advice on whether to buy any insurance product. At worst, get a second opinion or two from an unbiased source.
The Tough Part of a Long-Term Care Insurance Decision
I don’t know John’s financial situation, but I do know that he and his wife are in their early 50s and their two kids are through college and working (or on the verge of working—the youngest graduates from university next month). I’ll share below the main pieces of my reply to John, but I invite your suggestions, because LTC insurance is such a tough question. Would you share in the comments how you worked through the LTC insurance decision, or expect to work through it when the time comes? Thanks!
First, please know that except in really clear cut cases (‘No, please do not take out a payday loan to get your car repaired!’), I don’t tell readers who write asking for advice what to do. Many financial choices involve personal values and goals; I’m certainly not going to tell anybody what their priorities should be. Instead I suggest how the reader might think about the question to arrive at a decision with which he or she is comfortable.
Here’s what I suggested John:
- If he and his wife are in either of the two ‘easy’ categories above (poor or rich, basically), then don’t buy LTC insurance.
- Heavily discount his insurance agent’s advice and financial analysis (no doubt done with a tool developed by an insurance company).
- It’s a bad plan to just hope that long-term care needs won’t happen and effectively bury your head in the sand. But most people have alternatives to LTC insurance, in my opinion. For example, John could designate a chunk of his assets as a long-term care self-insurance fund. He would preserve this asset, and mentally set it aside, for long-term care needs only. Then he and his wife would need to plan the rest of their lives—when they’ll retire, how they’ll then live, etc.—excluding the value of this fund (which should be conservatively invested). If that means they can’t retire when they want or not to the lifestyle they’d like, then they can choose to work longer, save more, buy long-term care insurance, or some combination.
- I suggested to John that he might find it helpful to run some numbers on potential long-term care costs. An Internet search for calculators on the topic I’m sure would yield numerous results. This government calculator purports to estimate the gap between the average cost of long-term care needs and the savings you can dedicate to long-term care. Since the input data is minimal, I question the calculator’s value, but in combination with other research, it could play a role.
- Another factor is whether John would want to avoid relying on his kids for even initial long-term care. If he and his wife want to leave them out of the picture, then their long-term care expenses may be higher than otherwise.
- In my opinion yet another factor is the durability of insurance companies. One of my takeaways from the 2008-09 financial meltdown is that any financial company can go from healthy to busted in a matter of days. Consequently, I’m hesitant to pay money to an insurance company starting today and likely for years before I may receive any benefit. (I wrote about this topic in What About Annuities?)
- John and his wife need to consider their health prospects. Do they already have chronic disease, a poor family history, or unhealthy lifestyle that boosts the odds they’ll need long-term care, or are they healthy today? As an example, in my case, I have conditions that are likely to lead to an abrupt demise, so I think my odds of being in an extended long-term care situation are low.
- Again according to Forbes (see link above), women receive far more in LTC benefits per premium dollar than do men: 87 cents vs. 45 cents. So on average LTC insurance is a much better buy for women, while men evidently are dying too early and suddenly to really cash in!
What’s Your View on Long-Term Care Insurance?
To help John, me, and other Money Counselor readers, please share in the comments below any thoughts you have on the LTC insurance decision. Thanks!