Long-Term Care Insurance: To Buy or Not to Buy

While the decision whether to purchase long-term care insurance (LTCI) is not a new one, the passage and eventual implementation of the Deficit Reduction Act of 2005 (DRA) makes it more difficult to gain Medicaid coverage and more important than ever to consider LTCI. In fact, my colleague Harley Gordon would argue that for an estate planner not to recommend LTCI could be considered malpractice.

Whether or not Harley is correct or committing hyperbole, it’s a good idea to recommend that clients consider LTCI. The more difficult question is whether to go further and recommend that clients purchase policies.

Without getting into the choices among policies and carriers, which are far beyond my expertise, the challenging of determining who should purchase LTCI survives passage of the DRA. Here are some of the issues to consider.

Affordability

The client must be able to afford the policy now and for the rest of her life. But what does this mean? Must she be able to pay for the policy out of disposable income, or should she accept using savings and investments to pay the premiums?

On this issue, I defer to financial planners, who should be able to provide clients with projections of their future income and expenses, with and without the need for long-term care.

Insurance companies definitely hurt themselves in regard to the long-term affordability of LTCI premiums with their refusal to guarantee premiums, making it impossible to be certain about any projections of future costs.

Extent of Coverage

I’d argue that any policy purchased post-DRA should provide at least five years of coverage. But how large should the daily benefit be? I used to advise clients that the daily benefit, with their other income, should cover the full cost of a nursing home and that it should include an inflation rider given the increasing cost of nursing home care.

My friend, Ed Jette, however has taught me that LTCI may be thought of as "avoid nursing home" insurance. In that case, the policy, with other income, need only cover the cost of assisted living care to permit clients this more benevolent alternative to nursing home care. Such coverage is more affordable to more individuals.

Age

At what age should individuals purchase LTCI. On the one hand, the younger you purchase your policy, the lower your premiums will be. On the other hand, a 50-year-old today is unlikely to need long-term care for at least 30 years, and it’s impossible to know what long-term care options will be available then – or whether the medical profession will have found a cure to Alzheimer’s disease and other chronic ailments of the elderly.

Yet, an argument against delay is the risk of uninsurability due to physical condition increases with age. A fee-only financial planner I know has attempted to obtain the rates at which applications for LTCI are declined. He reports:

"...the figure I received from the Health Insurance Association showed an average 25% decline...unfortunately they did not break it out by decades, i.e. 50-60, 60-70 etc...in fact no one either had these figures or was willing to divulge them..."

I tend to think of this more in terms of functional age than of chronological age. If you are raising children or paying for their education, their support must be your primary concern and you should only consider purchasing LTCI if you have sufficient life and disability insurance, and can still afford to pay additional insurance premiums. But once your children are supporting themselves, or if you have no children, then it makes sense to divert some insurance premium dollars from life insurance to LTCI.

Family History

A final consideration is family history. Have your parents or grandparents suffered from Alzheimer’s or Parkinson’s disease or another chronic illness? Or have they lived into their 90s in perfect health with the faculties fully intact? Depending on your answer, it is more or less imperative that you purchase LTCI.

As you can see, everyone should consider purchasing LTCI, but the actual decision is far from easy.

Comments

[Ron Doucette]

After reading your well written, unbiased discussion of the Long Term Care Insurance dilemma,
it makes me think of the wonderful friend and client of many years. His health being wonderful,
and nursing a ailing spouse with the beginnings of dementia, the last thing I expected was his request to have me analyze the prospects of buying LTCI for his own future health needs. As we searched and compiled proposals the question turned to cost. I have found that any client discussion in this service agreement begins with their issue of cost. Sadly, the least important aspect of the "product" becomes cost when the need to apply for benefits becomes reality. Further, the quality of the underling credit credentials, i.e., Fitch, Moodys, S&P, A.M. Best, and more are low on their initial list of concerns. When the need arises, confidence in the ability of the issuing company to pay is so important. While dollars are certainly important, balancing the movable parts or riders to enhance affordability may be some solution. Understanding the system and asking the right questions will help. On my friends outcome: while he pondered the cost, he encountered a major stroke after a minor heart attack. His insurability ceased. Yet he is maintaining his lifestyle in a fine care facility out of his own savings. As you know, it is the solid guidance and the strong referral that secures the lasting client comfort when providing this service.

[Ron Doucette]

PS, Harry:
The Center for LTC Reform noted an excerpt from “Americans Less Concerned about LTC than 10 years Ago” column in the Senior Journal this month….”Asked how they would pay for LTC if they were not planning on buying insurance coverage, 43% of the respondents…said they’d pay the entire cost with savings. However, 46% felt they would not even be able to afford a year of LTC…”. There’s a disconnect here.
The “National Underwriter” included in a July issue, an article by Shawn McConnell entitled “Long Term Illness: Why It’s Called The Hidden Estate Tax and What To Do About It”. He states that Long Term Illness has been called the hidden estate tax for which there are no exclusions, limits or laws regarding whom and how much it can effect. “The ability of a long-term illness or disability to ravage a client’s estate is tremendous…LTC insurance, as a form of risk management, can protect these assets.”.
The article recommends that individuals who have the assets to afford LTC insurance, buy it as “it only makes sense to share the risk with a professional risk expert instead of insuring 100%”.
For example, for a client who paid 20 years of an annual premium of $3,484/year (approx. $70K in premiums paid into the plan), it would take less than 5 months to recover 100% of the premiums paid assuming the national average cost of care for 1 year of services (compounded at 5% for those 20 years of premium payments).

[Mark John Crews]

Harry,
Nice article.
In my opinion, there are two major issues that face LTC Insurance.
The first is that it is sold like a product. It needs to be part of a plan or strategy. Attorneys do Estate Planning when discussing wills and trusts(which are products). If a client has a 10 million Dollar estate, you'd probably concider a Life Insurance Trust as PART of the PLAN. But what if they were declined??? You'd still do an estate plan! Long term care Insurance needs to be part of a plan.
Secondly, most seniors still think that Medicare will take care of their HEALTH care. Problem is, they don't understand when health issues turn into LTC issues.

Mark

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