The Long Bet
Is Long-Term Care Insurance a Sound Long-Term Investment?
Three weeks ago my wife and I were informed by our long-term care insurance company that our premiums are increasing. These notices are an annual event. The premiums this year are up 59% from where they stood when we purchased the policies 13 years ago. However, our insurance provider thoughtfully offered us the option to trim the premium by reducing our benefits. We appreciate their kindness but have declined their generous offer.
We bought the policies when we were in our 50s, at the urging of a financial planner. It was hard to argue with his logic: If and when we need end-of-life nursing care, the cost will be astronomical, and the policy will cover a major share of the costs. We had seen for ourselves how such a policy rescued an elderly cousin from desperate poverty in her final years.
But now that we’ve paid the princely sum of $60,000 in premiums and can anticipate paying another $200,000 over the next 20 years – age 91 being my optimistic projection for the onset of decrepitude – it seemed like a good time to assess whether these insurance policies were a wise investment.
Nobody, and I mean nobody, looks forward to living in a nursing home or having daily, personal nursing care at home. But if we deny that it is likely to happen, we’re denying reality. Two out of three people age 65 or older will need that level of care at some point.
A long-term care policy covers some of your expenses if you cannot manage several “activities of daily living” on your own – activities such as bathing, dressing, personal hygiene, bathroom functions, or getting in and out of bed.
These services cost big time. In 2021, according to the Genworth’s Cost of Care survey, the national medium cost for a private room in a nursing home was $9,000 per month. It doesn’t take long for savings to dry up at those rates. Also, health care expenses have been rising more than 4% annually for years, while the inflation rate was 2%. So expecting those prices to fall is magical thinking.
Health finance experts differ on how much long-term care (without insurance) is likely to cost. An annual survey by Fidelity Investments, which seems credible, pegs it at $315,000 for a couple - $150,000 for a single man, $165,000 for a single woman. Included in that total are Medicare premiums, co-pays, and out-of-pocket services not covered by Medicare.
What about Medicare?
And speaking of Medicare, doesn’t it cover these things? Half of all Americans believe Medicare will cover their long-term care expenses. But in the words of Gomer Pyle, “Surprise surprise surprise!” Here is exactly what Medicare will cover: The first 20 days in a skilled nursing facility; part of the expense for days 21 to 100 after you pony up $185.50 per day; and from day 101 on, nada.
A few other facts about long-term care policies: every policy has an “elimination period,” the length of time the policyholder must be in nursing care before the policy kicks in. They range from 30 to 100 days (the latter consistent with Medicare). Also, no policy picks up all the costs. Policies have a maximum benefit amount, as well as a maximum length of time for coverage.
Do You Need Insurance?
With all that in mind, is long-term care insurance a sound investment for you?
You will be shocked to know that the answer is, it depends. Here are some clarifying questions.
1. Are you comfortable with your heirs receiving none of your assets?
If a lengthy run of nursing care is likely to deplete most of your remaining assets, Medicaid (a state-run program) steps in to cover long-term care costs. (Just be sure your nursing care accepts Medicaid.) Also, if only one spouse needs nursing home care, Medicaid generally allows the other spouse to retain enough assets to live above the poverty line. You might want to warn the next-of-kin not to bank on any windfall from your estate.
2. Do you have enough wealth to pay the full cost of nursing care without crippling yourself financially?
Then you don’t need insurance. You can self-insure with your own money. Experts say this can work for households with more than $2 million in assets. If your assets are below that line, insurance could help you preserve some of your assets from the health care system.
3. Can you qualify for a policy if you don’t already have one?
We acquired our policies when we were in our 50s. Insurers are writing fewer policies currently, and people in their 60s and 70s are unlikely to be accepted.
Of course, it’s always possible that you will never spend a day in nursing care, which would make those exorbitant premiums a colossal waste of money. Perhaps you have some inside information to help you divine the future. Short of that, your odds are still only one in three.
How is your appetite for gambling?
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don, you and i have a cousin who had a long-term care policy for herself and her now deceased husband. i think they were about 50 when they got it. it had no cap on it, something that's hard to find these days. but when she had to put him in assisted living, it cost $8000 a month. i was there one day when she was faxing the bills in. later that week, i was still there when she got her check. that policy paid for itself, i.e., she recouped their premiums, in less than a year. he only lived a few years once he was in that facility , but they got their money out of it. again, it had no cap on it which probably helped a lot. we checked those policies years ago. after a lot of discussion, we decided to invest in other things we had both been doing anyway. hopefully, we have more than we need to take care of ourselves, as we did with my at home bedridden mother for 3 years before she died. yes, we were spending "our inheritance." but until she died, it was her money that she and my father accumulated during their lifetimes. your info about medicare and medicaid is accurate. the only thing to add: you have to put your home into a child's name 5 years before you go into a nursing home or the state has the right to it if medicaid paid for your parent's care. as you said, if one spouse is still in the home, the state cannot touch it. but if both are on medicaid nursing home care, the state has the legal right to the home for the second spouse. in the past, people got clever and tried to deed a home to a child, etc. just before going to a nursing home,. so has to be done 5 years before assisted living/nursing home level of care. but i have heard too many stories about parents who deeded their home to a child, only to have the child essentially steal the house while mom or dad were still living there and leave the parent in poverty and/or homeless. so really have to know your own family well to do that. otherwise, well said!!
I am a retired financial advisor, and Long Term Care was part of financial planning for my clients.
Allow me to add that most of long term care benefits are payed for in home care. If the beneficially of the policy is unable to perform 2 or more ADL’s or is suffering from dementia, many times they can be treated at home. In home benefits range from in home nursing care, mental and physical therapy to construction of ramps for wheel chair access and more.