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Does Long-Term Care Insurance Make Sense?

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Last week, I mentioned how I spent two days learning about military retirement. The workshop covered a number of topics, but one of them, long-term care insurance, was one that I hadn't expected. It's something that I haven't covered previously on Lazy Man and Money. Truth be told, I knew very little about it.

To educate us on long-term care insurance the workshop brought in a speaker from an outside investment firm, Genworth Financial. However, it wasn't much of an education like the other parts of the workshop. This speaker couldn't have made it more of a sales pitch if he tried. He stressed that each of us is going to need some long-term care at some point, almost as if to create some kind of fear. He brought out the stats that the average cost for long-term care now is $82,000 a year and it is expected to double every 14.5 years. He strongly suggested that we get coverage now if you are healthy, because once you have a health condition, or take a prescription of any kind, you might not be able to get coverage - or you might have to pay more for it.

However, as the speaker explained how long-term care worked, it became clear to me that it didn't seem like a smart financial move. In fact, it seems quite limited. For one example, you don't buy insurance for the rest of your life - you buy a certain number of years of coverage. After that, that's the end of your care... you are on your own. Though the average person uses 3 years of long-term care, an Alzheimer might need 7-8 years. Buying 7-8 years of benefit coverage is obviously more expensive than 2-3. How many years of coverage should you buy? There's no easy way to know.

He also explained that in addition to a set number of years, long-term care plans also have a daily benefit allowance. So you might have purchased $150 a day of coverage for example. If you use only $100 of it a day, you'll get more years of coverage. If you use $200 though, you'll burn through your long-term care benefit faster than expected.

This sounds like a specialized annuity. I might be giving it too much credit - a simple savings account seems to do a similar job (provided you plan fair enough in advance as the speaker suggested we do). I pay money in now so that I can get money out at a later time. However with this annuity/savings account, I have to worry about paying more if my health isn't perfect. Even worse, he said that if the investment company doesn't manage the annuity/savings account long-term care plan well, there might be increases in premiums that have to be paid in. The speaker used this a reason to go with a company with a proven track record... the sales pitch continued. However, this made me want to consider long-term health insurance even less. Think of all the pension shortfalls. Professionals sometimes don't plan for the distant future very well. If they make mistakes, I would have to pay more. What if they managed the money well, would they lower premiums? Perhaps I should have asked that one.

The salesman speaker twice mentioned that Long-Term Care is great because you don't know need to draw down on your other retirement assets like 401k plans, IRAs, etc. I had to stifle a laugh. What are my 401k and IRAs for if they aren't to provide me with income in time of need? I'm not putting money in them so that my bank's computer has can get some digital bits to do a little dance.

The bottom line is that we all have a fixed amount of money to prepare for the future. In my opinion, it comes down to a question of whether my money is best invested in a retirement vehicle or a long-term care one. Long-term care plans will vary, but you should be able to figure out the total value by multiplying the daily benefit by the number of years. For example, $150/day for 3 years would be $164,250 of coverage. The salesman didn't go into what the premiums were for that kind of coverage, but you could take that money put it in your own investments or buy an annuity with it.

If it sounds like you'd be doing better investing it yourself, that seems to be the way to go.

Posted on April 18, 2012.

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Financial Planning, Health

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18 Responses to “Does Long-Term Care Insurance Make Sense?”

  1. Patty says:

    http://consumerist.com/2012/04/jury-award-alzheimers-patient-34-million-after-insurance-company-cuts-off-care.html

    You may find this consumerist article of interest (I hope the link works).
    It is interesting that the military did not bring in an agent from USAA. Last time I checked, they were still pushing LTC and they have a little more credibility.
    I like your analysis. It’s hard to believe that these companies will be around to service our claims when we need them…IMHO. I will trust my own investments when that time comes.

    • Lazy Man says:

      Everyone was surprised that USAA wasn’t the choice for the speaker as well. The thought was that maybe they couldn’t fly someone from USAA’s headquarters in San Antonio (I think) to Washington D.C.

      Wow, that’s a big judgment there in that Consumerist article. 30 Million in damages?

  2. Patty says:

    I believe there was a big “punitive” factor in that award. However, I did read on another site (sorry, no link, so I might not be accurate) that Montana has a $10 million limit. The concern is that after an appeal, there won’t be much of a settlement. I just want these companies to honor their contracts and the bottom line is that I think they are untrustworthy. I was glad to see you address this subject with your usual logic.

    • Lazy Man says:

      Yeah, still 10 million is a pretty big financial award. I still think of it as $30 million… it’s just state law limiting it.

      I hope that most of these companies are trustworthy, and I would trust USAA, but I still there are better ways to fund your long-term care.

  3. Revanche says:

    I did a LOT of research into this four years ago, though I can’t remember why I didn’t blog it all – exhaustion? Ultimately, I never could find a good enough plan that was worth trusting with my money given the premise and the problem I was looking to solve.

    Obviously the reason I spent so long looking at it was because I was worried my health was deteriorating at a fast rate and I already had dependents but even then, it simply wasn’t sensible to use any of the LTC products on offer and they were state limited so if I moved out of state for a better job that would have been wasted money as well.

    • Lazy Man says:

      Thanks Revanche,

      I guess I hadn’t considered the case where someone young (like yourself) would have dependents and a health problem. In this case, I’ve always thought about life insurance as being the fix. Though it seems like disability insurance might be a better fit.

      I didn’t realize that LTC products were state-limited. That doesn’t make any sense to me. If I purchase a benefit and I need it, seems like it doesn’t matter if I need it in Florida or Delaware. That makes it seem like a really poor choice all around.

  4. […] Does Long-Term Care Insurance Make Sense? @ Lazy man and Money […]

  5. Raymond Lavine says:

    You have a variety of options whether you need caregiving services before you retire and age:

    1. Family will take care of you
    2. Family will help pay for your care services
    3. You and your spouse take care of one another
    4. Use your own resources
    5. VA benefits
    6. Medicaid

    The helpful method is (a) information on internet (b) speak with your financial or professional advisors (c) speak with a LTC person who has knowledge and expertise.

    Smart people inform themselves and decide whether it is beneficial to transfer a portion of the risk to an insurance company.

    We transfer the risk for health, auto, home, and other forms of insurance. Most are happy that we never have to use the coverage.

    Whether healthy or not — before you die you may well need care. Stuff happens to us and caregiving is is emotional, physical, and financially challenging.

    I suggest to people that they ask people who have been care givers. Visit a care facility.

    When you do — you will decide to have a caregiving plan.

    Raymond

    • Lazy Man says:

      Raymond,

      Thanks for the sales pitch. This is similar to what the LTC salesman said. I don’t see how one transfers the risk to an insurance company with LTC insurance. It sounds like that is obviously the case, but it seems like LTC insurance is just paying an annuity or using your premiums to pay out your benefit at a later date.

      Let’s compare to some other insurances:

      Car – I need car insurance, because I may get in an accident and do major financial and/or physical damage that requires a lot more money than I have. The insurance charges me a premium to protect me from this risk.
      Life – I need life insurance if I have dependents because I want to make sure that they have the financial resources to take of themselves in case I die before the dependents can support themselves (or I can support them another way).

      Each of the above cases protects me against catastrophes and in those cases pays out significantly more money than I put in to get me through it. With LTC insurance, it doesn’t protect against any catastrophe that I can see. I know I’m going to need LTC at some point, so I’m saving for it now. It also doesn’t pay out significantly more money than I put in (just the money plus interest earnings).

      This is why it doesn’t make sense to me. It doesn’t seem like insurance at all.

  6. Steve says:

    These policies are, so I hear, often bought in people’s 40’s and 50’s. I guess at that point people have the disposable income and have started feeling their mortality? I haven’t looked into it a ton, being only in my 30’s, however what little I have found hasn’t been encouraging.

    I’ve heard rumors recently that LTC companies have been having some problems. Apparently their actuaries made some underestimations.

  7. […] Lazy Man & Money asks Does Long-Term Care Insurance Make Sense? […]

  8. MJS says:

    LazyMan,

    Revanche is flat out wrong. I sell a ton of LTC. I’ve sold big policies to people with 8 figure net worth and I’ve sold small policies to people who wanted a portion of their care covered. It is absolutely not state specific. There may be one company with that kind of archaic policy, but almost every legitimate company allows you to live and get care in any state you choose.

    I also wouldn’t be looking at it at your age unless there is a history in your family of the big 4 (Alzheimer’s, MS, ALS or Parkinson’s). Otherwise, I would wait till early 40s to at least investigate.

    Many companies are getting out of the LTC business because the policies they already issued are too client favorable. They can’t afford to underwrite anymore.

    If you would like to have an offline conversation about it, I could show you why it really is an awesome deal. Since I don’t think you need it, it wouldn’t be a sales pitch.

    MJS

    P.S. Genworth has a decent policy, but not spectacular and definitely not what I would call a strong company when it comes to financial stability.

    • Lazy Man says:

      You never know what one person’s experience is when it comes to talking with salesmen. I know Revanche pretty well and if she looked into something there was likely significant research involved.

      I’d love to get more information on the point of long-term care. If it just covers a portion of care, any number of guaranteed investment vehicles will do the same. What’s the advantage?

      I’m curious why someone with a 8 figure net worth would want a LTC policy. Why not just put a million (as an example) of that money in a safe investment for the purpose of long-term care. Seems like simple budgeting or asset allocation, not an insurance situation.

  9. MJS says:

    You can crunch the numbers, but let’s use this scenario from said client. He was 55 at time and worth about 10M. He bought a $300/day, 100% home, unlimited length w/ 5% compound benefit. Pays about 7k a year. A good nursing home in this area is about $120k a year. Let’s say at 85 he develops Alzheimers and lives for 10 years. He paid 210k for about 2M of benefit when you add inflation of nursing care costs (I am using round numbers, not doing the literal math). Even if he could self insure, and he can, why would he? Why not transfer the risk? I think your investment rate of return would have to be significant to match those numbers. You’re the expert. Do the math and tell me where I’m wrong. Almost all planners, even fee based ones, and even the federal government thinks it makes sense. It just have to be bought the right way, from the right company and with an appropriate benefit.

    • Lazy Man says:

      Thanks for the detail here. This is very much appreciated.

      Well the Genworth advisor specifically made points multiple times about how LTC have limited lengths. Many people asked about some kind of unlimited plan that would cover them so that they don’t outlive their coverage. He kept going back to the limited terms of the benefit. He was essentially telling us unlimited didn’t exist. If unlimited LTC does exist, it does indeed fit the profile of insurance as it covers the case of 10 years of Alzheimers… or longer. It’s no longer buying an fixed-term annuity which is the way it was pitched.

      In looking at this example, the benefit is $300 a day or around $110,000 a year. Since the benefit is paid out when it needed, I presume that isn’t raised for inflation, right? So the client will receive $300 in 2042 dollars (30 years from today, when the 55 year old is now 85). Is that correct? If so, he will receive 1.1 million in benefit. If it is indexed for inflation at 3%, it will be nearly 2.7 million in benefit (the $300/day becomes $728/day in 2042 to counter inflation). I don’t mean to be a math stickler as I know you were using round numbers, but I either see it as a 1.1 million benefit or a 2.7 million benefit, which is a sizable difference from a 2 million estimate.

      One component missing from this example is what happens if he’s hit by a bus at age 85 and dies instantly, never using his benefit? Does the policy pay anything out to the estate or is that the risk that you take potentially get a 2 million dollar benefit for $210,000 of premiums. If that’s the case, that’s fine, it’s a judgment call like just about any insurance that one would buy. In that case the reason why he wouldn’t by the plan is that he’d be putting $210,000 in something that may never pay a dime. If the person does get his premiums back if he doesn’t use his benefit, it seems like insurance companies might be going bankrupt before he gets to use it in 2042 – can’t make money paying out $2 million to someone who only paid in $210,000.

      I did some math and for the person to self-insure a 1.1 million dollar benefit at $7,000 a year for 30 years they would need to make 9.5% interest every year. That’s a tall order. If we are talking a 2.7 million number, it jumps to about a 13.75% interest rate, which is off the charts. For an insurance company to pay out that much in this scenario, something seems off.

  10. Steve says:

    Insurance has to be profitable for the insurer. Otherwise they wouldn’t be in the business! Do you disagree?

    It follows logically that if an individual can afford to self-insure a given risk (without it ruining him or her), it is profitable for that individual to do so. It may be risky and high variance but it’s a +ev bet.

  11. Evan says:

    My office sells LTCi, and I am often conflicted by the product. On one hand I hear everything that MJS is saying, specifically about transferring the risk. That is huge especially in higher net worth cases.

    On the other hand, LazyMan makes some good points and one in particular is huge for me – no guarantee of future premiums. That is a scary scary thing.

    MJS, is 100% correct – some HUGE players have been exiting the business quickly! Hartford got out as did Hancock.

    I think the new product de jure is going to be a whole life policy with an LTCi rider on it. A few companies have recently come out with it and they look fantastic on the surface.

  12. TreborWatts says:

    I used to sell LTC, but am not licensed now, so I’m not selling anything.
    My personal experienece though, may be useful. My parents bought LTC policies in their 70’s. It was ‘expensive’, according to my mother, as it cost $14,000/year, total for the two of them. Mom and Dad owned their policies for ten years, and then BOTH needed them at the same time, but for different reasons. Once they started using them, they were spending $14,000 PER MONTH for 24-hour help with getting dressed, bathed, and getting up and down to go to the bathroom. So guess what? They GOT ALL THEIR MONEY BACK, in less than a year.
    Now they had securities, cash, money markets, bonds, etc., which could have been used to pay for their care, but what would they have used to pay their RENT? With the LTC policies, the insurance company paid for their care, and their savings went for the things they WANTED it to go for in retirement, namely food, shelter, utilities, birthday and Christmas gifts, trips to museums, etc.
    As for state-specific, some states have ‘partnership’ programs that work with their Medicaid departments. These programs allow owners of LTC policies to keep as much in assets as they have in face value coverage, as a reward for advanced planning. States know that LTC coverage keeps people off of the Medicaid rolls longer than people who do not have coverage. Remember, one must have spent ALL of one’s assets down to $2500 before one can go on Medicaid, including the liquidation of one’s home. Being in a LTC situation will burn those assets very quickly. Now, it is true, if you move your family member to another state, you may not get credit, but most states have reciprocal agreements that will allow for portability.
    As for getting $2M in benefits if you get hit by a bus: no insurance policy, by law, can give back the face value without the triggering event occurring. Some policies may give back some or all of the PREMIUM, but they cannot–again, by law– give back more than the policy holder paid, unless the holder dies, has an accident, or whatever the event is that is being covered by the policy.
    And yes, if you die by bus before you need the care, you won’t get the benefit. But you will have been paying for Medicare Part B, homeowners/renters insurance, etc., and won’t get those benefits either. But again, it’s back to deciding how much risk you’re willing to self-insure.
    Also, for companies going out of business: the states will still provide a ‘trustee’ company that will administer the benefits according to the original contract, even if the issuing company does stop operations. Likewise, for companies still in business that have stopped issuing policies, the company will honor the existing contracts even if it will not issue any more contracts to new clients.

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