Who Shouldn’t buy Long-term Care Insurance? A Long-term Care Insurance Contrarian View

Okay. Confession time. I’m a long-term care insurance contrarian. So fair warning. You can find plenty of people who disagree, but I have a hard time recommending long-term care (LTC) insurance.

Just too many problems.

Early in my career, I was a senior insurance regulator and no other category of insurance caused more complaints per dollar of premium sold than long-term care insurance. People weren’t getting the value of the promise for which they paid. To complicate matters it wasn’t that much better for insurers. Several companies went bust because claims were higher than expected and many others exited the market to stop the losses. So I may be gunshy.

Yes, policies are better and more predictable today after a series of reforms. But policies are also much more expensive and limited. Other problems remain.

If you feel compelled to ignore my reticence, at least look at the National Association of Insurance Commissioner’s A Shopper’s Guide to Long-Term Care Insurance. http://www.naic.org/documents/prod_serv_consumer_ltc_lp.pdf

Nursing Care is Expensive

Yes, a year in a nursing home can be very expensive. The insurance industry estimates the nationwide average at more than $100,000. (Lincoln Financial Group says $102,900 in 2017 up 3.3% from 2016.)

But that average may not reflect your local market. Our rural market is much less. And some providers believe that average is inflated to motivate insurance sales. See, James Berklan’s April 2017 column in McKnights, a long-term care industry trade publication. http://www.mcknights.com/news/wheres-the-indignation-been-from-providers/article/647087/

LTC Policies Limit the Amount or Duration of Benefits

Regardless, most policies now cap benefits at either 2-3 years or a fixed dollar amount like $200,000 (more like life insurance). Tough luck if: your provider charges more; inflation multiples the cost of a year; or you need multiple years of care. Again, it’s not really covering the catastrophic case.

Insurers can raise the annual premium

Further, is it really insurance if the premium can increase in dramatically year-to-year? Even if it’s affordable today at 58, will your policy remain affordable at 78 or 84? You’re clearly not getting one key benefit of insurance — predictability. As the number of insureds inside a particular policy risk pool shrinks the premium tends to escalate, a lot. And people stop paying the premium.

Money quotes seniors shocked by premium increases as believing, “I should have banked the money instead [of spending it on LTC insurance I can no longer afford.]” Why Long-term Care Insurance Is Becoming a Tougher Call

As a consequence, a very high percentage of policies sold are dropped before a claim ever occurs. More than a third of those insured at age 65 drop their LTC policies, most without ever filing a claim. Why do People Lapse Their Long-Term Care Insurance, Boston College Center for Retirement Research

How statistics lie

And then there’s the bottomline. Most elderly never are in a nursing home for more than the 100 days per spell of illness already covered by Medicare for short-term rehabilitation after a hospital stay. Rehab is common after a surgery or other health crisis.

So ignore this statistic — “About 70% of people who reach age 65 are expected to need some form of long-term care at least once in their lifetime.” It appears in a lot of places including a recent PBS article. As boomers age, most woefully unprepared for LTC, PBS

It lies two ways. “Some form” includes care by family members — which 80% of the population ultimately relies upon. And most Medicare or private pay skilled nursing facility admissions are for short-term rehab already covered by Medicare. 40 Must-Know Statistics About Long-Term Care, Morningstar

There are benefit limits and hoop jumping involved with Medicare, but the basic point remains. If you have Medicare you already have coverage for the most common nursing need, post hospitalization rehabilitation.

The Medicaid Backstop

Yes, Medicare doesn’t cover long-term skilled nursing care. But for a large share of low-income elderly, Medicaid does.

Medicare provides age or disability based benefits. Medicaid provides a safety net for low-income and low-wealth Americans.

A long stay may require spending down personal assets to qualify for Medicaid. But in truth that means Medicaid is the backstop. It’s an imperfect backstop. You may not get your preferred nursing home provider, location, or the best decor or care. Price is less predictive of quality of LTC than you’d think. But Medicaid is taxpayer-funded catastrophic long-term care insurance.

Your risk isn’t average or set in stone

Also, ignore statistics about the general population. Those that can afford LTC insurance need to focus on the risk group that looks like themselves. Guess what? High-income, upper-middle-class elderly are healthier as a group and less likely to need extended skilled nursing care. Carve out Medicaid beneficiaries and younger accident victims and the numbers change. The numbers change dramatically. It’s like average life expectancy. If you’ve already reached age 85, you don’t have to worry about childhood mortality. Age-adjusted life expectancy suggests if you’ve lived this long, you’re likely to live longer than the average newborn from your birth year.

Plus it may be cheaper to modify your risk than pay insurance. Overweight? At risk of Type II Diabetes and its multiple co-morbidities? Diet and exercise are cheaper than LTC insurance. Pills and surgery are not the only answer. Long-term care is not an inevitable outcome.

Low-probability but high-cost risks

Is long-term care a risk you can afford to insure against? Or is it more like cancer insurance? Or accidental death insurance? Sold on the fear? Do you really care how you die in figuring out what your spouse or family may need after you’re gone? The key word is dead not how. Similarly, LTC insurance may be both too restrictive and inflexible. Very few disabilities can be managed only by full time nursing care (in a facility or at home).

Who should (and shouldn’t) buy LTC insurance?

I’d feel better if the financially-interested sellers of long-term care insurance answered two questions clearly:

  1. Too Little Money to afford?
    1. Who shouldn’t buy LTC insurance because their income is too low to prioritize LTC? 
    2. Who shouldn’t buy LTC insurance because their wealth is too little to protect? A Medicaid eligible person shouldn’t be spending limited dollars on LTC insurance when there are more immediate and certain demands for food and shelter.
  2. Too Much (or Enough) Money to bother? Who shouldn’t buy LTC insurance because they have enough wealth to self-insure. Surely, Bill Gates or Jeff Bezos needn’t bother with LTC insurance.

If someone gives me a good explanation of the LTC insurance sweet spot — who’s in the middle between too little money to afford and too much to bother, I might be persuaded differently.

Barron’s at least takes a shot at these questions in a 2012 article. Retirement: How to Pay for Long-Term Care But Barron’s found a catch 22. Those that may need LTC insurance still can’t afford it. Those under $250,000 in wealth should rely upon Medicaid according to Barron’s. Start to think about self-insurance in the $1-2 million in retirement wealth range.

For now, we’re choosing to self-insure.

All-risk rainy day retirement savings vs. single-risk LTC insurance

We’d prefer to keep the time value of money on our side. Our retirement savings are protection against all forms of a rainy day. Why give up so much savings to an insurer’s pocket? A LTC policy protects against one and only one relatively unlikely bad event. Our rainy day fund covers all unknown future needs or risks. If we’re really unlucky, maybe we have to rely on Medicaid or the kindness of others. There’s always the techy geek and beautiful daughter in IT. But most people die avoiding that big nursing home ordeal. The truly bad claim would blow through the available, affordable policy limits anyway. It looks more like nuclear war. It’s a low probability risk for which we can’t afford to buy insurance that would make a difference.

A trip to Hawaii sounds like a better investment. Heck we could do ten or twenty trips to Hawaii (no cheap destination by the way) for the cost of long-term care insurance.

Most Americans Reject LTC Insurance

We’re not alone. The long-term care insurance market is shrinking despite almost universal advice to buy. (Remember, I’m a contrarian, but contrarians don’t get paid a commission.) Consumers aren’t buying. And many companies are no longer selling.

LTC Insurance market sees rapid decline

And yes we’re aware of and have shopped hybrid long-term care policies that combine a life insurance policy with a long-term care rider or option. Hybrid policies don’t solve the basic affordability problem. 2015 Long-Term-Care-Insurance-Trends

One big caveat that gives me pause. Elderly women are less likely to have a surviving family caregiver as an alternative to a nursing home. Given the mortality tables, men get loving care at home before death from their spouse. The surviving women have to pay for their own care in the end. The impact of divorce on Baby Boom couples may make this solo care problem less female-specific in coming years. But elderly singles without supportive family members may need to bite the bullet and buy LTC insurance. They simply have fewer options when the risk is realized.

Additions and Updates

LA Times: Insurance firms’ blunders on long-term care insurance create disaster for millions (7/24/2019)

The Collapse of Long-Term Care Insurance — The American Prospect (10/20/2020)