Long-term care insurance is a subject we don’t want to think about but many of us know we need to. At first look, policies that help pay the costs of extended care make perfect sense. Bills add up quickly when you can no longer take care of yourself and your needs exceed what family and friends can provide. Nursing homes, assisted-living centers and home care all are expensive, and there is no telling for how long you may need the service. Buying a long-term-care insurance policy can be a way of making sure your future physical needs will be met. Policies can give you and your family a way to protect savings in the event of health care costs that stretch on for years.
Being financially ready for the possibility that you will require long-term care is an important part of retirement planning. With long-term care costing as much as $250 a day, it doesn’t take long to completely deplete a lifetime of savings. For those who buy and keep their long-term care policy, they do not regret it. No one who has paid premiums and receives their benefits from the policy regrets having paid those premiums. And no one ever regrets being fortunate enough to never need those benefits.
The biggest misconception is that Medicare covers long-term care. It does not. Medicaid pays for various long-term-care services and support but only for the poor. However, long-term care insurance is not right for everyone. The wealthy can be reasonably sure their savings will be enough to pay directly for long-term care. Despite concerns about quality, Medicaid is there for the poor.
But what about consumers with midlevel savings—in other words, most people? These consumers need long-term-care insurance the most. They tend to have too little savings to pay for even a couple of years of care without impoverishing themselves and their families and have too many assets to qualify for Medicaid.
Critics of long-term-care insurance argue that many who need long-term care use it for less than 90 days and that most policies have a 90-day deductible, meaning most owners of long-term care insurance will receive no benefits. But who wants to play those odds hoping they’ll be one of the people who only need such care for less than 90 days? The fact is that most people who need long-term care need it for at least a year or two. The important thing to understand is that there are a wide range of policies offering different degrees of security, but all preferable to taking the chance of being financially decimated.
In a worst-case scenario, a person in nursing care might outlive the purchased coverage wiping out his or her savings. People especially concerned about this might consider so-called Partnership Policies, developed by private insurers and state governments and offered in 40 states. These plans let people qualify for Medicaid’s long-term-care benefits while they still have a good savings to spend on other things or leave for their family. (Normally, a person can have no more than $2,000 in savings for Medicaid to pay their long-term-care costs.)
Partnership plans that offer to protect savings of up to $100,000, for example, will pay up to $100,000 in benefits. Then, if the purchaser has savings of more than $100,000, he or she becomes responsible for their long-term-care costs until their savings are reduced to $100,000. At that point, Medicaid will take over the expenses.
Long-Term Care Insurance is a Crap Shoot
Buying insurance is basically gambling. You calculate the costs, risks and benefits and hope that you come out ahead. The industry throws out scary statistics such as “50% of all seniors will go into a long-term care home,” or “the average stay is two and a half years.”
It may be more useful to learn that 70% of seniors who do go into a long-term care home are discharged within 90 days, and that after two years, less than 6% of those admitted will still be there. Currently, out of 40 million American seniors alive today, approximately 1.5 million currently live in nursing homes, about 3.7%.
The 90-Day Rule
Another important point: Most long-term-care policies don’t pay anything until the person has been in a nursing home for more than 90 days. If more than two-thirds of those going into nursing homes leave before 90 days are up, it is unlikely that most consumers will receive any benefits at all.
Proponents argue that having a longer exclusionary period helps the insurers offer lower premiums. Another way to look at it is the lower premiums reflect the companies’ view that their liability is reduced and that payouts are less likely on those policies. It doesn’t matter if the policy costs less if you can’t use it.
Does that mean long-term-care insurance is unsuitable for everybody? To some extent, it depends on your personal wealth. If you have little wealth, a policy will never be suitable. You will be covered by the long-term care provided by Medicaid. If you have assets of at least $1.5 million, the smarter move might be to either self-insure or use your resources to pay for high-level in-home health care.
For mid-wealth individuals, the answer isn’t so clear. The average annual premiums for policies sold to seniors run around $3,500 per year. But nearly all policies don’t pay 100% of the daily private pay rate, currently about $250 per day. Policies typically pay $150 a day. So, even a resident with a policy will have to dig into savings to pay the difference. But instead of buying a policy and paying premiums, you could set aside savings for long-term care. At $3,500 a year, in 20 years you would have $70,000 plus interest. In the unlikelihood you end up in a nursing home, you could use these savings to pay the bills.
Admittedly, if a stay in a nursing home exceeds the set-aside savings, you will be worse off than if you had long-term care insurance. On the other hand, if your stay doesn’t exhaust your savings, you will have kept your money and done better than if you had insurance. It’s a risk either way.