Long-Term Care Insurance: Yes or No?
According to Genworth Financial, a major issuer of long-term care insurance policies, a private room in a nursing home averages $92,378 ($253/day) in 2016 while a home health aide, who works under the supervision of a registered nurse or therapist to assist with daily routines such as bathing, grooming, dressing, and medication reminders, averages $46,332 ($127/day) in 2016. As astronomical as these costs appear now, they are only going to get larger as baby boomers age and the demand for this care grows. Over the past 5 years (2012-2016), the annual cost for a private room in a nursing home has averaged a 4% increase per year. Based on a current annual average cost of $92,378 in 2016, a 3-year stay in a private room of a nursing home would cost a whopping $277,134, assuming that prices don’t continue rising. Contrary to popular belief, Medicare and other forms of health insurance do not cover these health care expenses because long-term care is not considered a medical expense. Therefore, unless you are confident that you can pay for this care yourself, you may want to consider purchasing some form of long-term care insurance (LTCI).
Premium Costs May Increase
When it comes to long-term care insurance, the biggest dilemma facing the average consumer is that the cost of LTCI is almost as shocking as the cost of a nursing home stay. A typical policy taken out by an Illinois couple in their early-50s can initially cost around $3,100 in annual premiums for the two of them. While premium increases for LTCI policies do not occur regularly or often, when they do, they can sometimes increase dramatically with rates known to increase from 30-60% in one fell swoop. The reason that insurance premiums on LTCI policies do not increase on an annual basis is that in order to increase the premium on a LTCI policy, the insurance company must present its case for the increase to a state’s Department of Insurance and request a premium increase for an entire “class” of policies, such as “all policies issued to people 50-54 years of age in the year 2005”. If you happen to fall into that “class” of policyholders for that age bracket and that year in that state, then your premium may be increased. You may wonder why a state insurance department would ever approve a premium increase on a LTCI policy. Shouldn’t an insurance company have to stand by the policy that it originally wrote for a policyholder? The reason is that, in certain situations where the current premiums collected by the insurance company are too far below the anticipated claims to be paid out to policyholders, there’s a significant risk that the insurance company could be rendered insolvent and unable to pay all of the claims to policyholders without an increase to the current premium of the LTCI policy. The underlying conclusion reached by the state’s Department of Insurance is that it’s better to have a premium increase to ensure all claims made by policyholders are paid than to keep the premiums in place at the risk of the insurance company going bankrupt.
Will You Ever File a Claim?
Two deterrents that often cause people to not purchase LTCI are the high premium cost of the insurance and the thought that they will never use it (i.e., file a claim). According to Limra, an insurance-industry research firm, only about 8 million people have some form of long-term care insurance coverage, and sales have been declining because of the news over the past 2-3 years about large rate increases in premiums. Experts in the LTCI industry believe that part of the problem is the widespread denial by consumers that they will ever need the care (i.e., will never file a claim). If you are currently in your mid-50’s and in good health, it’s hard to imagine that one day (possibly 30 years from now) you will be too frail and unable to take care of yourself. In addition, you may believe that your children (or spouse) will step in and take care of you when, and if, the need arises for long-term care. However, your children (or spouse) may not have the time or the technical expertise to provide the level of health care that you may need. As Americans continue to live longer, it is forecasted that the need for long-term care is only going to grow.
You may never need long-term care. But, according to America’s Health Insurance Plans (AHIP), a national association representing nearly 1,300 members providing health benefits to more than 200 million Americans, about 19% of Americans aged 65 and older experience some degree of chronic physical impairment. Among those 85 or older, the proportion of people who are impaired and require long-term care is about 55%. Therefore, as the American population grows older, the odds of entering a nursing home, and staying for longer periods, increases. According to the U.S. Department of Health & Human Services, the likelihood that the average American turning 65 will need some form of long-term care is estimated to be about 70%.
Should You “Self-Insure” Against the Risk of Needing Long-Term Care?
A number of financial planners favor the method of “self-insuring” because, in part, they lack faith in LTCI products, but also because they believe that if you put the money that you would have paid in premiums into a diversified 60% equities/40% fixed income portfolio, you can create your own pool of funds to draw on down the road for long-term care, if need be. There is a good chance that a diversified portfolio, compounded over 25-30 years, will yield sufficient funds to pay for most of an average person’s care. Additionally, under this scenario, if you end up not needing these funds for long-term care, they will pass along to your heirs when you pass away rather than going to the insurance company in the form of premium payments. However, this rationale can only work if you have the discipline to invest the money that you would have spent on premium payments and whether your returns on your investments will keep pace with health care inflation, which has significantly outpaced general inflation for years. Therefore, you may want to employ a form of “forced discipline” by purchasing a LTCI policy. A good LTCI policy may also protect you against the rapid pace of health care inflation.
As you can see, the decision to purchase a LTCI policy is not an easy one. There are many pros and cons as to whether you should “self-insure” or purchase long-term care insurance. If we had a crystal ball and could look 25-30 years into the future, the decision would be easy, but we don’t. Therefore, all we can do is analyze our own situation and try to reach a conclusion as to whether long-term care insurance is appropriate for us given our own individual scenario.