A while back, I wrote Why We Are Not Buying Long Term Care Insurance, a post which explained our decision to self-insure against the risk of needing long-term care. We looked at the topic in detail and decided to NOT buy LTC insurance. It’s a hot topic, and it generated a good debate (54 comments in that post, wow!).
One of the responses was from Scott Olson, who happens to sell Long Term Care insurance at his site LTCShop.com. As you’d expect, Scott has strong opinions about the topic and disagreed with my conclusion. He got pretty wound up about it, actually, as you can see from his following tweet:
The Other Side Of The Story
In fairness to my readers (and, because Scott is an expert in this field), I offered Scott the opportunity of a guest post to provide the other side of the story. He makes some excellent points in the article below and his viewpoint is helpful in a more comprehensive look at the topic of LTC Insurance.
The important thing for each of us is to fully understand this issue and decided for ourselves if LTC insurance is worth the cost. It’s not an easy decision, and the LTC world is rapidly changing. Seek out an expert, but make your own decision.
Hopefully, proving Scott’s insights will provide a more complete view on this topic, and allow you to make the best decision for your situation. With that, here’s Scott….
Scott’s Reply – When LTC Insurance Makes Sense
As a licensed insurance broker, specializing in long-term care insurance since 1995, you may be surprised that I agree with much of what Fritz wrote in his post, “Why We Are NOT Buying Long-Term Care Insurance”.
I would never buy a long-term care policy that increased in cost every year.
To help decide if he should buy long-term care insurance, Fritz got a quote from a local agent. Unfortunately, the policy this agent sells increases in cost EVERY YEAR by 5%. Using the rule of 72, we know the premium will more than double every 15 years. By the time Fritz reaches his early 80’s, the premium would be four times the original amount. If Fritz lived into his mid-90’s, the premium would be EIGHT TIMES the original amount.
I’ve met people who bought policies like this 20 years ago. They regret it. This is the worst type of LTCi policy. Fortunately, less than 4% of LTCi policy owners have this type of policy. I agree with Fritz’s analysis. I would rather self-insure than buy this type of policy.
If the risk was just “facility care”, I wouldn’t buy long-term care insurance.
Most people who need long-term care receive care at home. Very few people need nursing home care. Most nursing home stays are less than 90 days. Fritz references a poorly researched article on ElderLawAnswers.com. In it, the author tries to determine the probability of needing long-term care.
In his calculations, the author assumes the number of people receiving care at home is about the same as the number of people in facilities. The author’s assumption is off by about 500%.
According to the Congressional Budget Office, about 80% of the people who need long-term care receive care at home. Only 13% of the people who need long-term care are in a nursing home. For every four people in a nursing home, there are 25 people receiving care at home. In other words, for every carload of nursing home residents, there’s a busload of home care recipients.
That’s why my wife and I own long-term care policies where 100% of the benefits can be used for care at home (or a facility–it’s our choice).
If only one of us were to need care for less than three years, I wouldn’t buy long-term care insurance.
I would NOT want to withdraw hundreds of thousands of dollars from our retirement accounts to pay for three years of care, but if needed I would do that. But the real risk to our financial independence is if one of us needs care for more than three years. That’s why my wife and I have policies that share 10 years of benefits. We want to protect our assets from the worst case scenario: Alzheimer’s/dementia.
Nearly every long-term care insurance company today offers couples the ability to share 10 to 16 years of benefits. Two companies offer policies with no limit.
Also, over 40 states have Long-Term Care Partnership Programs which can protect 100% of your assets from Medicaid spend-down if your long-term care policy runs out of benefits.
If I knew we would not need care until our 80’s, I wouldn’t buy long-term care insurance.
Needing care in our eighties or nineties is not a risk. That’s pretty much a certainty. If we live long enough we’ll need some level of assistance. If, in the last few years of our lives, my wife or I use all of our assets to pay for our care, so what! We can’t take it with us.
The real risk is if one of us needs care in the first half of retirement, not the last half.
I know a couple, Paula and Zack, who retired in their fifties. Shortly after Paula turned 60, Zack was diagnosed with early-onset Alzheimer’s.
What should she do? Should she deplete their retirement accounts to pay for his care? She was only 60. She could live another 30 years. She’ll need that money just to live.
Should she give up horseback riding and all the things she loved to do in order to be his 24/7 caregiver? How would caregiving affect her own health?
Fortunately, a few years before they retired they purchased long-term care insurance. Over the past 9 years, his policy has paid over $650,000 in benefits. Zack’s received all of his care at home.
Instead of being his caregiver, Paula oversees his caregivers. Instead of deciding which account to liquidate next, she just sends the bill to the insurance company each month.
If huge premium increases were likely, I wouldn’t buy long-term care insurance.
It is true that many of the older long-term care policies had large rate increases. To prevent rate increases, 41 states have enacted strict pricing regulations for new policies.
For an insurance company to be allowed to sell a new long-term care policy today, the new policy must include all of the company’s prior rate increases in the new pricing and include an additional “cushion” (about 10%) as extra protection from rate increases.
The new regulation has also removed profit from rate increases.
However, most group policies (e.g. Federal Long-Term Care Insurance Program, CalPERS, and other self-funded groups) do not comply with these new regulations.
Smart investing and Long-term care insurance
If your portfolio is $1 million, would you alter your investment mix to gain an extra 0.4% (four-tenths of one-percent), if the new investment mix could result in you losing hundreds of thousands of dollars?
If your portfolio is $2 million, would you alter your investment mix to gain an extra 0.2%, if the new investment mix could result in you losing hundreds of thousands of dollars?
If your portfolio is $4 million, would you alter your investment mix to gain an extra 0.1%, if the new investment mix could result in you losing hundreds of thousands of dollars?
For about $2,000 per year, per spouse, a 59-year old couple in good health, can own $1.2 million of long-term care benefits. By sacrificing a little bit of your return each year (0.4% or less), you protect your capital.
It’s that simple.