I have a good number of clients who are in their mid-50s, and hearing from friends and colleagues that they should consider obtaining long term care insurance. They’ll often quote stats about the staggering percentage of us who will need long term care services at some point in our lives, or the mention the high cost of services.
These are valid points. But there are equally valid reasons NOT to obtain a policy. I’ve written on long term care insurance in the past, and how to determine whether you’re a good candidate for it. Since this is a topic that comes up in my practice with some frequency, I thought I’d devote another post to the top arguments for and against long term care insurance. If you’re reviewing your own situation and wondering whether to obtain coverage, you should consider these six points.
Let’s start with the top arguments FOR obtaining long term care insurance:
1) There’s a Good Chance You’ll Need Care at Some Point
Long term care services are described (in insurance policies) as requiring help in two of six “activities of daily living”. The six activities are:
- Eating
- Bathing
- Dressing
- Getting on and off the toilet
- Getting in and out of bed or a chair
- Maintaining continence
Needing help with two of these six activities is a triggering event for long term care policies. Policyholders in this situation can make claims on their policies.
The stats say that 68% of us will require long term care (needing help in two of the six areas) at some point in our lives. This is a staggering number. And with longevity rising around the world, I wouldn’t be surprised to see that number climb over the next 20-30 years.
While not everyone will need help for a long period of time (many will only need some assistance for a couple weeks, maybe after recovering from surgery) chances are pretty good you’ll need a hand at some point. Rather than relying on family or friends, long term care policies can pay for professional help in your home or a stay in a facility.
2) Long Term Care is Expensive
According to longtermcare.gov, the national average for long term care services in 2016 is as follows:
- $225 / day for a semi-private room in a nursing home
- $253 / day for a private room in a nursing home
- $119 / day for care in an assisted living facility (one bedroom unit)
- $20.50 / hour for a health aide
- $20 / hour for homemaker services
- $68 / day for services in an adult day health care center
As you can see, the costs add up quickly. There is a fair amount of regional variation in the numbers above, but even in the least expensive areas of the country, you’re looking at $60,000 or more per year for a semi-private room in a nursing home.
For many, this kind of cost over a multi-year period would be a catastrophe financially. Yes, Medicaid would step at some point & pay for services, but you truly need to spend through your assets before that happens. The possibility of losing your financial independence is a pretty good argument of obtaining a policy.
3) Your Other Insurance Probably Won’t Cover It
On top of all this, long term care services are generally not covered by health insurance policies. And seeing as how a) you’ll probably need it, and b) it’s expensive, there’s a real possibility that long term care could jeopardize your financial independence.
That doesn’t necessarily mean you should pick up a policy, though. Aside from the drawbacks that I’ll spell out below, you probably shouldn’t obtain a policy if:
- You’re wealthy enough to self insure, or;
- The premiums themselves could jeopardize your financial independence
The only time I’d consider a policy is if you can afford the premiums AND you can’t afford the cost of care.
Now let’s review three arguments against obtaining long term care insurance.
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1) Premiums Can Rise In the Future
Long term care policies are expensive to start with. Depending on your health & where you live, a 60 year old couple is probably looking at annual premiums of $4,000 or so for a middle of the road policy. On top of that, since so many of us will need long term care services in the future it’s likely that the premiums on a policy you obtain today will rise significantly in the future.
Insurance companies aren’t free to raise rates however they please, though. They’re required to submit a formal request with the state insurance commissioner, which can be denied. This is a bit of a barrier to raising rates, but it still happens from time to time. And when it does, the magnitude of the hike is usually bigger to make up for other years. For example, in 2018 MassMutual submitted a request to raise rates on 3/4 of its policyholders by 77%. This covered about 54,000 policyholders. So while it’s nice to factor in long term care premiums to your financial plan today, there’s no guarantee they’ll skyrocket sometime down the road.
2) The Elimination Period
According to the American Association of Long Term Care Insurance, many people these days are buying policies with 90 day elimination periods in order to make the costs more affordable. The elimination period is the amount of time that must elapse before your policy will pay a claim. Of people purchasing policies with 90 day elimination periods, only 35% ever draw on them. That means that policyholders either haven’t needed care, or they’ve needed care for less time than the 90 day elimination period their policy requires.
Alternately, the same post states that 20% of people needing care require help for less than three months. So even if you have a policy, there’s a 1 in 5 chance that you wouldn’t even be able to draw on it if you opted for the 90 day elimination period to reduce premium costs.
3) Rapidly Increasing Cost of Care
Costs of long term care are rising faster than policies account for. According to Genworth, the cost of assisted living facilities rose 6.67% last year, while the cost of a semi-private room in a nursing home rose 4.11%. Many long term care policies do factor in some type of inflation, but I’ve never seen one greater than 3%. If a policy covers a steadily decreasing portion of the actual cost of care, it becomes pretty tough to justify paying the premiums. Imagine a situation where you’ve paid premiums for 10 or 15 years, only to discover that when you need to make a claim, the benefit only covers 70% or less of the cost. Ouch.
So there you have it. Three arguments for and against long term care insurance. When working with my financial planning clients, I try to help them understand the financial implications of needing care for an extended period of time. If it’d be catastrophic to their finances but they can afford a policy, I usually recommend that we at least kick the tires. If not, there’s not a compelling reason in my mind to pursue it further.
What do you think? Have you considered long term care coverage? Why or why not?
