One of the most frequent questions I get from clients is whether to buy long-term care insurance. With the average cost of a private room in care facilities topping $94,000 a year, according to a 2013 study by insurer John Hancock, it’s a reasonable concern. Many of us will need some form of long-term care (LTC), so the question of whether to buy insurance to help with the associated costs is a real one.
I think the decision is a very close call. At age 57, I’ve made the choice not to buy LTC insurance for my family based on the following four reasons:
1. Premium Hikes. I have clients who come to me having paid their long-term care premium for a decade, only to find that it suddenly doubled and they don’t know what to do. They have already paid so much in premiums and are now older and more likely to need the benefit they have been paying for. The reason behind these huge increases is that a number of insurance companies went into this business with little understanding of the costs they would be paying. Expenses proved to be far higher than estimated, and rates skyrocketed as many insurance companies exited the business altogether. Thus, I tell my clients they may pay a flat premium for years only to face this same dilemma.
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2. Profits. As is true of any business, LTC insurers expect to make a profit. That is to say, they expect to pay out, on average, less than you pay in premiums. They also get to use your money for years to invest before paying out any claims to you — if ever. Put differently: You may do better not paying the premium and investing the money in low-cost stock portfolios.
3. Costs of Care. The true cost of assisted care may be less than the number I cited above. That’s because other outside expenses — such as travel, homeowner’s costs, food and recreation — decline significantly. You may, for example, no longer be spending $50,000 on living costs, so your out-of-pocket expense may increase by only $44,000.
4. Longevity. According to a study reported in the Wall Street Journal , 44 percent of men and 58 percent of women over the age of 65 will spend some time in an assisted care facility. But the study , published in November by the Center for Retirement Research at Boston College, found that of those numbers, 50 percent of men and 40 percent of women stay 100 days or less. Medicare will cover the full cost of care in a skilled nursing facility for 20 days and partial costs thereafter, up to 100 days. So, for a great many of us, the LTC policy may never kick in. Of course, you don’t know in advance which side you’ll land on.
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For these reasons, I chose to self-insure for long-term care. It’s the same logic I use for why I recommend having a high deductible on the collision portion of auto insurance (but high liability and an umbrella policy). We insure for what we can’t afford to lose.
So while I often counsel clients to self-insure this risk, you may want to consider LTC insurance if you want to protect your assets for your spouse, heirs or charity. Or perhaps you don’t want to be dependent on a government program. Buying long-term care insurance will give you more control and independence, which in itself could offer a benefit by providing peace of mind.
You can also choose to partially self-insure by buying a policy with lower benefits, such as a longer elimination (waiting) period or a lower daily benefit. Finally, newer hybrid policies combine annuities with long-term care. While they provide some tax benefits, returns are likely to be very small.
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