Is Long-Term Care Insurance Worth It?

by Darwin on July 23, 2010

My mom asked me about long term care insurance recently and I started to mull over the financials to see if it made sense or not.  We had some experience with other distant relatives that had to tap the insurance and in one case, they were surprised that they didn’t qualify when they thought they would due to the fine print.  First, it’s worthwhile understanding what it’s all about and how it might help you or your loved ones as they age.

What is Long Term Care Insurance?

Long Term Care Insurance is different than your conventional health insurance or life insurance.  It’s insurance that’s meant to offset the costs associated with long-term care you may need in the future, typically a consideration for the elderly who anticipate health issues in old age.

Key considerations of Long Term Care Insurance

At a high level, you get what you pay for, right?  So, if you’re looking for very generous coverage, you’re going to pay high premiums.  The key facet of these programs is that it’s not just getting insurance payouts for “getting sick”, but rather, you’ve got to qualify for a series of activities that you’re unable to perform and then the policy pays for support to perform those duties.  For instance, if you can’t perform pre-determined activities like dressing yourself, feeding yourself, etc., the policy would generally cover the cost of either a long term care facility or in-house assistance.

Your health and age matter quite a bit in what kind of rate you’re going to pay.  On the applications I reviewed, I noticed they asked about tons of different ailments and whether you were EVER or within the past 10 years, diagnosed with certain ailments.  Of course, the older you are, the more likely it is that you’d need to tap the policy as well, so those risks are factored into the premiums.

Unlike what you’ve probably heard in the news about certain malicious health-care practices, the insurance company can’t cancel your policy once you become sick.  Once you sign the policy, the actual language of the policy can’t change and you should be able to continually renew for life.  For that reason, some advisers advocate that you start a policy early in life.  You’ve got to balance that with the costs though.

Example

Let’s say you purchase a policy from a major carrier that has a premium of $3000 per year and provides coverage for up to $250 per day of expenses for up to 6 months, but it only kicks in after a waiting period of 120 days.  These are some typical key terms you’d see in a policy.  So, let’s say you have an ailment that requires an extensive hospital stay followed by an assisted living facility, but it’s only about 2 months that you’re out of your house, the policy wouldn’t pay out to assist at all since you hadn’t hit the 120 day threshold.  This is often a surprise to people who sign up for these policies without reading the fine print.  Another catch is that you may have to fail to be able to conduct 3 or 6 or some number of activities as opposed to just one.  So, if you can’t dress yourself, but you can feed yourself, use the bathroom and do everything else, the policy may not be activated.  Therefore, it’s key early on to really understand what you’re buying.

My Thoughts

Insurance is not an investment.  You don’t actually hope that you need it, just like you don’t hope you die to collect on life insurance and you’re not rooting for a wreck to have a “positive ROI” on your auto insurance.  It’s a risk mitigation tool.  Can you personally weather a catastrophic event in your life from a financial standpoint?  If so, then there’s no need to consider it.  If not, then you’ve got to consider whether the premiums, the coverage and the likelihood of such an occurrence equate to a prudent use of funds for a policy.

Personally, my wife and I don’t have policies, and probably wouldn’t consider one in the future since the premiums are very much likely to exceed any benefit we’d see (the insurance company’s gotta make a profit, right?) and we have other assets/insurance to help cover such circumstances.

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1 franny July 24, 2010 at 9:52 am

In evaluating LTC insurance you also need to think about inflation. If you think that there will be significant inflation between now and the time you may need to access the benefits, you will probably conclude that it is not a good deal. Paying large premiums in 2010 dollars to receive payments in 2030 dollars is a losing proposition, IMO.

[Reply]

Darwins Finance Reply:

@franny, Good point, I didn’t even include inflation in there. Would be interesting to see what the actual return is IF activated 20 years down the road.

[Reply]

2 Scott A Olson July 25, 2010 at 12:25 pm

Who should own long term care insurance is a good question. I think it makes more sense for a married couple to own a policy, rather than a single person. If a single person uses all of her savings or income to pay for care, it may not directly impact a dependent or loved one. If a spouse or domestic partner requires care and uses up a significant portion of the couple’s savings or income to pay for the care, the healthy spouse would have quite a burden to bear: both emotionally and financially.

Should the wealthy own long term care insurance?

Today, most business owners (and self-employed persons) can use pre-tax dollars to protect their personal assets with LTC insurance. Also, there are LTCi policies available that will refund all the premiums to your heirs (even if you were on claim for a lengthy period of time.) The returned premiums can be passed to your heirs outside of the estate, through a trust. Additionally, the policy’s benefits can be paid to the trust and passed to the heirs outside of the estate. This can be an effective strategy for reducing the size of your taxable estate, while increasing the assets passed on to your heirs.

Scott A. Olson
http://www.LTCShop.com

[Reply]

3 Jesse Slome July 25, 2010 at 1:03 pm

You are right that long term care insurance isn’t an investment and that you hope you never need it. Some 180,000 people received claim benefit payments in 2008 from their long-term care insurance coverage. These are the largest open claims (still being paid) and yes, these people may be receiving back hundreds of times what they paid for protection. But, long-term care insurance is not the lottery. This is not something you really want to win … but it sure can prove to be valuable protection.

COMPANY A: Largest open claim: $1.2 million
The individual (a woman) purchased long-term care insurance at age 43, paying an annual premium of $1,800. Three years later her claim began and has continued for almost 12 years ($1.2 million in benefits already paid).

COMPANY B: Largest open claim: $1.02 million
The individual (a woman) purchased long-term care insurance at age 72 paying an annual premium of $12,766. Three years later her claim began and has continued for almost 9 years ($1.02 million is benefits already paid) for her nursing home care.

COMPANY C: Largest open claim: $990,000
The individual (a woman) purchased long-term care insurance at age 57 (in 1992), paying an annual premium of $1,215. That same year she had an accident and has been on claim ever since (almost 15.7 years). Total paid (as of 12/31/2008) $989,730 … proving “you just never know.”
Jesse Slome
Executive Director
American Association for Long-Term Care Insurance
AALTCI.org

[Reply]

4 Jesse Slome July 26, 2010 at 11:43 pm

Here’s how inflation protection grows the benefits of a LTC insurance policy.

We typically look at a 3-year benefit plan (the middle of the road in what folks buy). Yearly cost for a $150 daily benefit for a 55-year old is $1,084 (AALTCI’s 2009 study) and provides $172,600 of immediate benefit. With 5% compound inflation growth, the value of the benefit grows to $457,957 at age 75.

Compound inflation protection about doubles the cost of the “base” plan but it also provides the greatest growth. Most companies offer various forms that cost less. It’s why it pays to work with a knowledgeable pro which you can find on the Association’s website.

Jesse Slome
American Association for Lontg-Term care Insurance
AALTCI.org

[Reply]

5 Villhelm September 23, 2010 at 8:22 pm

Mr. Slome, in response to your July 25 analysis of payments made by Company A, B, and C, I believe that you have overlooked a very important point.
You example states that Company A has made LTC payments for 12 years, Company B has made payments for 9 years and Company C has made payments for 15.7 years. I find that to be a highly unlikely scenario since most LTC insurance packages today have payment limits of approximately 6 years unless the recipient is not drawing the full monthly benefit, in which case the payments could continue beyond the 6 year limit. If these recipients are still receiving payments into the years you have stated then they obviously are not requiring full nursing home or assisted living benefits, thus making their benefits last longer.
The average nursing home or assisted living person who is drawing full benefits will see their benefits come to an end at the end of 6 years if their policy was written to pay for that duration of time. Then they are own their own to finance their care and most of them will resort to Medicaid at that time.

[Reply]

6 Scott A Olson September 24, 2010 at 1:17 pm

Mr. Villhelm,

Most long-term care policies have a variety of choices for the Benefit Period.
Common choices include:
2 years
3 years
4 years
5 years
6 years
10 years
Lifetime/Unlimited

Most of the leading long-term care insurer offer a “Lifetime” (aka “unlimited”) Benefit Period. That means that no matter how long one might qualify for benefits, the policy would never stop paying the benefits.

Over the past 15 years about 30% of my clients have chosen a Lifetime/Unlimited Benefit Period. They are people who want to protect against the worst-case scenario (e.g. Alzheimer’s) and make sure that their policy could never run out of benefits.

I’m sure that the examples that Mr. Slome provided were for people who had chosen a Lifetime/Unlimited Benefit Period.

Scott A. Olson
Redlands, CA

[Reply]

7 Luke Sleaford July 18, 2012 at 5:53 am

You can buy long term care insurance where the price is guaranteed. But that’s probably not the best way to go. You buy LTC insurance so you and your family have options when care is needed. So you can get care at home instead of being forced into an institution.

[Reply]

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