LTC – To Buy or Not to Buy?

The decision on whether to buy long-term care insurance vs. self-insuring is a question many clients ask. If you can afford to self insure based on your planning, then the choice boils down to whether you would like to retain the risk or share the risk with an insurance company. The goal would be to take the worst-case scenario off the table if possible.

Insurance companies offer many different products with various bells and whistles (such as LTC with life insurance or annuities), so it is important to determine what you would like to cover and what you can afford to pay on premiums. Since you have no idea of the final outcome, and there are many variables and unknowns such as if and when you will need care or how much the insurance company may raise the premiums in the long term, this comes down to what makes you sleep well at night.

You will also need to make sure you qualify for long-term care as some pre-existing conditions may prevent you from being insurable. You can also potentially get a discounted premium if you and your spouse choose to purchase policies together. Long-term care costs and increases in premiums can also vary by state.

Some policies allow you to use the benefit in whatever way you would like — so, if it’s a three-year benefit option and a starting monthly benefit of $6,000, this means you have a total starting coverage of $6,000 times 36 months or $216,000. If you start using the benefits this year, as an example, and you used the maximum benefit every month, you would run out of money in just over three years. However, if you start using 50% of the monthly benefit instead, then your coverage can last twice as long, or six years.

For the majority of people, buying a long-term care policy is all about care at home, according to a study done by Boston College. The study puts the lifetime risk of needing nursing home care at 44% and 58% for 65 or older men and women, respectively. Also, the study concluded that nursing home stays are shorter than previously believed: 10 months for the typical single man and 16 months for a woman.

If you decide you want to go ahead with a policy there are several considerations such as:

How many years to insure for? What are the advantages and disadvantages to insuring longer and shorter? According to the Society of Actuaries’ studies on long-term care insurance claims, the average time for claims that last longer than a year ranges between three and one-half to four years in 2014. Usually between two to four years is a good ballpark; three years is about average. The longer the benefit period, the higher the policy benefit, the higher the cost. It is a trade-off between accumulating and using the benefits and not using them at all. Essentially, the longer the benefit period, the higher the risk the client might end up paying thousands of dollars in premiums and getting nothing in return.

Can the policy premiums change and, if so, by how much? Many insurance companies increase premiums and you have no idea if or when this may happen. You might be paying $3,000 annually for a policy for 15 years and the insurance company decides to raise your premium to $5,000. If you decide this is too costly after 15 years and cancel the policy, you have already paid $45,000 to the insurance company and have not used the benefit. However, like other insurance such as homeowners, you may be paying for peace of mind but never have to claim on it.

Clients who cannot afford to self-insure now because they do not have enough assets accumulated may be able to insure during the earlier years. As time progresses, there may be a point where their assets can support an LTC event and at this point, the policy can be terminated or modified for less coverage. Keep in mind when a single person goes into LTC their expenses may move laterally (if you go into care you will probably sell your house and car and no longer travel) but with a couple, when one goes into care the other spouse still has the usual living expenses so you are faced with increased costs.

Is this a cash plan (indemnity) or a reimbursement plan? A cash plan has more flexibility since you are paid a cash benefit equaling the entire daily benefit vs. being reimbursed for actual expenses. A reimbursement policy will only pay the full daily benefit when the actual cost of care is greater than or equal to the daily benefit. Policies with a cash benefit are more expensive. However, if you have a cash plan you have the option of paying a relative or friend to care for you.

If you do go into care and come out, does the policy reset, or do the benefits paid reduce the benefit available for the next occurrence?

Are there any policies with compound interest available and if so what do they cost? Compound has better inflation protection but may have a higher premium. Some policies have a 5% simple interest vs. others with a 3% compound interest. Depending on the policy and the rate, simple interest may be a better option over the long term as the breakeven may not occur until later. Inflation is compounded but if the LTC policy uses simple interest, at a certain point inflation overcomes the simple interest and the policy pays for less than the actual costs.

Does the policy have a waiting period? The shorter the period the more expensive the rider. You will be responsible for any costs during the waiting period.

LTC usually turns into a less than ideal investment at some point. The decision to buy is very individualized, and if you happen to use it early, it can be a good investment since you have paid less premiums upfront and are using the benefits. The longer you take to use a policy, the lower the return on the policy. If you end up using the policy in the first five to 10 years, this can be very advantageous. However, the longer you take to use the benefits, the more sense it may make to just put money aside yourself if you can afford to self insure. Of course, there is no way of knowing if and when an event will happen.