Is long-term care insurance worth the money?

Randy Deaton |

Submitted by Everest Retirement Planners on February 21st, 2020

By Randy Deaton

Groucho Marx, the famous comedian of stage, radio and television, once said “Getting older is no problem.  You just have to live long enough.”  So true, in fact Groucho eventually did live a long life; he died at 86.  Unfortunately, due to his advanced age the funnyman developed dementia requiring assistance with daily activities.   These days with modern medicine getting older is not the problem.  The problem is we’re living longer! 

Probability of Needing Long-Term Care

Unfortunately, with advanced age comes the increasing chance of needing assistance to do activities of daily living.  According to the American Community Survey conducted by the U.S. Census Bureau in 2017 35% of people 65 and older have limitations in performing activities of daily living.  This includes things like shopping, cooking, bathing and dressing.  This percentage increases dramatically the older a person gets.  It’s estimated that more than 50% of the population older than 75 needs assistance with daily activities.

Cost of Long-Term Care

What’s worse, the assistance required isn’t cheap.  According to a study done by Genworth in 2019 the national average for assisted living was $49,000 per year and for a shared room in a nursing home $90,000.  Moreover, the cost is increasing faster than inflation.  While a long-term care need could happen anytime it’s likely it won’t occur until late 70’s or 80’s.  In the year 2040 the annual cost for nursing care is estimated to be $168,000.

Surveys indicate that the average care requirement is for a period of two to three years usually followed by death.  When you take the annual expense projection multiplied by two or three years it’s easy to see how this can be financially catastrophic for retirees. 

Ways to Reduce Cost

To keep expenses low, some say their family will take care of them, maybe their spouse or children.  In theory that makes sense.  After all, who better to take care of you than those that love you.  While it sounds good, when you think about it it’s often not optimal. 

First, as mentioned, the probability of needing long-term care is highest at the later stages of life.  At that time your spouse will be older and likely unable to provide the physical strength needed to assist with things like transferring.

Then there are the children.  Unfortunately, in today’s world children move away.  They’re geographically unable to provide support.  Or maybe some children move away, but there’s still one that’s local and can provide the care.  Great, but keep in mind this can often cause animosity among the family as one is stuck with all the responsibility.

Even if the children remain nearby do you really want them to do what may ultimately be required, things like assistance with bathing and toileting?  These needs become real as we get older.  In fact, it’s a big part of what caregivers in nursing homes spend their time doing for residents.

Insurance-Based Protection

So, if we recognize that the cost is significant and primary care from family members is not ideal how do we address this risk?  Well if you don’t want to pay out of pocket or if you don’t think you’ll have the money set aside, the cost can be transferred to an insurance company. 

Unfortunately, you can’t rely on traditional health insurance to financially assist with this type of care.  Regular health insurance or, if retired, Medicare insurance (and related private insurance) is designed to pay for a portion or all incurred healthcare costs, if your condition is viewed as ‘rehabilitative’.  Generally, if your health condition can be improved with some form of healthcare service or medication your insurer is usually obligated to pay.  So, if you break a leg or need your appendix removed that’s an insurable expense. 

On the other hand, if your condition is viewed by your healthcare provider as ‘custodial’ your health insurance won’t cover the cost.  For example, if a stroke has caused you to be permanently impaired your insurance won’t pay the cost of an aid to assist you.   Similarly, like Groucho, if a cognitive decline has your family afraid to leave you alone the cost of an aid is not covered by traditional health insurance.

However, there are insurance policies designed to cover this type of care.  With most policies, benefits are triggered when one of two things has occurred, (1) either the insured needs assistance with two of six defined activities of daily living, which are bathing, dressing, feeding, transferring, toileting or maintaining continence or (2) the individual has a cognitive impairment such that he or she cannot be left alone.  Either of these two criteria will contractually obligate the insurance company to pay benefits.

Considerations

Of course, you would think that once the insured qualifies for benefits the insurance company would cover all related costs of care.  However, most policies limit the amount of benefits paid each month.  The monthly maximum benefit amount is determined up-front when the policy is applied for.  The bigger the monthly benefit desired the more expensive your policy will be. 

You would also think that once you qualify for long-term care benefits the insurance company would continue to cover expenses if you need long-term care.  That’s not the case.  Today’s policies have a finite pool of benefits.  With most traditional policies after 3 to 6 years the benefits will be depleted.  Like the monthly benefit amount, the benefit pool is elected during application.  The longer the benefit period the more expensive your policy.

What if you want to receive your care outside of a nursing home?  For a slight increase in the cost of insurance you can get coverage for expenses incurred at home or in assisted living, which for most is a preferred add-on  There are also other bells and whistles that can be added to your policy which may or may not be worth it.

One concern many have is the possibility of paying premiums for the rest of your life and never needing the benefits.  With traditional insurance this can absolutely occur.  Of course, I would argue that you did receive piece of mind knowing throughout retirement you’d never be a burden on your children.  I think you would agree that’s worth something.

However, if you want to be assured you’ll receive a financial benefit from your policy no matter what, the insurance industry offers long-term care protection built within life insurance.  In this instance the benefit will either be paid to beneficiaries at death or if you need long-term care the death benefit is accelerated to meet your monthly care needs.  When comparing traditional policies to those built within life insurance there are unique advantages and disadvantages of each which is a topic for a future blog.

Cost of Insurance

So, if there is protection offered by insurance companies to transfer this risk away why don’t more people get this protection.  The number one reason given is cost.  So how expensive is traditional long-term care insurance?  Well…it just depends.  Policy premium is a function of many variables including:  benefit period, monthly benefit amount, deductible (known as the Elimination Period), annual benefit increase, home and assisted living benefit availability, etc. 

A big factor that also impacts premiums is the age of the insured.  The older you are when applying the more expensive the policy.  Why?  Because the older you are the shorter period before your probability of needing benefits and therefore the less time for the insurer to collect premiums.  In addition, your health also matters.  At application pre-existing conditions like osteoporosis, type-1 diabetes, etc. may cause the insurance company to deny or quote a higher premium due to the increased risk of a long-term care need.

Example

Let’s take a couple, both 62, seeking traditional long-term care insurance.  They want just enough insurance to cover the average expected need.  They’re both average health.  They each elect a monthly benefit of $4,500 per month.  To keep up with rising costs they elect to have their monthly benefit increase by 5% compounded each year.  They also elect a 4-year ‘shared’ benefit pool, meaning that the pool will support a four year need in different combinations between the two insureds.  They also desire to have care expenses covered at home, assisted living and/or a nursing care facility.

So how much protection do they get with this policy?  Well their probability of needing long-term care is likely 20 years away.  At that point the monthly benefit growing at 5% per year will be approximately $12,000 per month for a total of 48 months.  That’s over $500,000 in insurance protection.  After qualifying for benefits if they don’t need the full amount each month the benefit period will be extended by the unused amount.  Statistically, this policy should meet the average couple’s needs.

So, what’s the cost?  For this protection you should expect a quote in the range of $5,000 per year.  Not cheap!  If you pay premiums for 20-years that’s $100,000 paid to the insurance company.  Is it worth it?  Without knowing if you’re going to have a care need down the road it’s hard to know.  But, consider this, in 20-years the expected cost for nursing care is estimated to be $14,000 per month.  If you had a care need for only 8 months you would have spent what you otherwise could have spent on insurance premiums over that same period.  If your care needs exceed 8-months you would’ve wished you had the insurance. 

Investing versus Insurance

Of course, there are those that say they will invest the money they would have paid for the insurance.  However, if you invest $5,000 per year for twenty years you would need an average rate of return of 13% to reach $500,000 equaling the benefits available with the insurance.  Those returns are not likely and if you had a care need earlier in retirement the investment account may not be enough to cover the cost.  Obviously, if a care need doesn’t arise there’d be more money for your legacy.  If legacy’s important maybe it’s a consideration, but is potentially not having enough saved worth the risk?

Of course, all this analysis assumes that the insurance company won’t raise your premiums.  Policy premiums are designed not to increase and technically, they’re not allowed to increase premiums if your health situation changes.  However, if the insurance company missed the mark on their projections for an entire product-class, they can seek approval from the state insurance board where the policy was sold requesting a premium increase.  In recent years this has happened and may likely happen again.

Personally, while I like the protection insurance provides if you think you’ll have resources set aside to cover the expense why not self-insure the risk.  Today, there is software available that can run a detailed financial projection of your retirement and tell you the probabilities as to if you’ll have enough funds to cover this potential expense.  If the probability is high that you will, I would take a pass on the insurance.  However, if resources look questionable or if you want to protect your resources from a spend-down then compare what kind of insurance-based protection strategy makes the most sense.

One thing is for sure…as we age the risk of a long-term care need is real and potentially significant.  The number one cause of impoverishment among the elderly today is the cost of long-term care.  There’s much to consider.  What you must do though is decide to decide!  The biggest mistake most make is they push-off the decision or bury their head in the sand.  Easiest thing to do is nothing!  Keep in mind that by doing nothing you’ve made a decision.  

Most would agree leaving a financial legacy would be nice, but what’s more important is to never be a burden on your children or have your care choices be curtailed resulting from a spend-down of your financial resources.  Again, lots to consider.  So, is long term care insurance worth the money?  It just depends!