Thoughts on Long-Term Care Insurance

A few months ago I was traveling with a co-worker who's about 15 years or so older than I am. The conversation turned to personal finances and then, specifically, to long-term care insurance (LTCI). I asked him what his plans were and he took me through the issues he and his wife had discussed and ultimately what they had decided.

I've been thinking about this topic off and on and as a result have collected a few pieces I thought I'd share with you.

The first is from Fox Business and asks if buying long-term care insurance is worth the cost. They don't really answer their own question, but they do make a comment that I'd like to highlight:

You should purchase [LTCI] when it is financially affordable. Younger people who buy it now will have the benefits of longer protection with lower premiums than if they wait until a later age. Of course, before you purchase it you should also consider life insurance and disability insurance to protect your income.

I'm not sure I'm in the "buy it as soon as you possibly can" camp, but I do think it's better to buy it before you show any signs of needing it but are still close enough to potentially using it that it's not 40 years away -- which for most people would be in their 50's to early 60's.

Also, I'm starting to see where LTCI fits into the pattern of insurance throughout a lifetime. It goes something like this:

• During your working career, you need medical, life, and disability insurance to protect you and your family in case something should happen to you (and your income).


• As you get older, you become self-insured and can drop life insurance. For people who are at least decent money managers, this is 20 to 30 years into your career on average. (We took out 20-year policies when we had our first child and we will let them expire when he's 20. By then we will easily be self-insured.)


• As you start to transition from work to retirement, you need to add LTCI to the mix -- let's say at age 55, but it can vary widely.


• As you retire, disability insurance goes away and medical insurance transfers to Medicare (and potentially gap insurance to cover what it doesn't). LTCI remains and is your primary insurance at this point in life.

Does this progression seem reasonable or am I missing something?

The nest piece, from the NY Times, was interesting to me because it highlighted the potential costs of LTCI.  Their thoughts:

For instance, he gave an example of a 55-year-old couple in good health buying a typical “three year” policy—one that uses a daily rate of $150 over three years to calculate a maximum benefit payout. (A three-year policy doesn’t mean that it only pays benefits for three years. Rather, the time period is used to calculate a total pool of money that can be tapped over time, as needed.) The couple would pay about $2,000 a year in premiums for a policy with a current value of roughly $164,000 for each spouse (at a 3 percent inflation rate, the value would grow to $350,000 for each, at age 80).

By comparison, the same couple would pay more than double that premium — about $4,335 a year — for an unlimited policy.

Not the cheapest insurance in the world, but it's not crazy expensive either. I pay $3k or so for disability insurance each year and that's just for me. So to pay $4,335 to cover both my wife and me isn't out of the realm of reason. Then again, it's a lot more than the cost of life insurance!

Then I saw that Forbes recently said that LTCI is one of the most complicated personal insurance products.  They start with what I consider to be a great overview of the situation:

Not everyone will need long-term care insurance (LTC), but everyone needs a long-term healthcare plan.  Your long-term care plan should incorporate the following: facts about you (and your spouse, if applicable), your age, your personal health, longevity of lineage, your retirement income and assets, your tolerance for risk, the costs and demographics of long-term care in your geographic area and information about any long-term care insurance that you own or have considered owning.

They then cover the various considerations we all need to make when looking at LTCI before they get to this summary:

In addition to making sense of the myriad of moving pieces in the policies, the problem that scares away most prospective insureds is the bottom line price.  If you buy the policy designed to insure virtually every possible scenario you may encounter—say, a $200 per day benefit guaranteed to pay a benefit for the rest of your life—you will, indeed, find shocking premiums that may send you packing.  The solution, however, for many people is to partially-insure the risk of a long-term care incident or incidents. Consider a policy with a reduced benefit, like $100 or $150 per day, and a shorter benefit period, like three or five years.

This seems reasonable to me. To use LTCI for a major part of potentail needs, but to also partially self-insure yourself through your own retirement savings.

Finally, I ran into a couple resources dealing with LTCI. The Forbes article above links to an app that helps you compare LTCI options and start on estimating pricing. And this cost of care map helps estimate the sorts of costs you may be looking at covering. The cool thing is that it allows you to compare one state's cost to another's -- so if you're thinking of moving in retirement, you can see if your LTC costs will increase or decrease.

So I'm still researching this subject, not 100% sure of what I'm going to do. How about you? How are you dealing with/thinking about this issue?

Comments

[Mark]

My opinion is, why buy long term or disability insurance at all? If something catastrophic happens, just get on the government dole (disability if you've worked, SSI if you haven't). Everyone else does, and in most cases, it is fairly easy to get approved (I know, I used to work in claims for Social Security).

As we've seen countless times over, the financially prudent and responsible get screwed to favor those irresponsible but politically viable. Think "struggling homeowners," saving up for college only to be disqualified for aid due to the FAFSA, and many other examples.

[Matt]

All I can say is another insurance product. Ugh.

Sorry but with all the exclusions that can be written into policies today you don't know if you are covered or not. You need to be a lawyer to understand your coverage. I know of people screwed on ther homeowners insurance with claims that I thought would be valid. Nope.

If the insurance industry had a better track record of not screwing there policy holders or limiting coverage I may consider it more. Paying all that money just to exclude your claim.

The faith is not there.

[Bruin]

Family medical history is a huge consideration and a key reason we signed up in our 40s. If all goes as we expect, this policy should spare our kids some tough decisions and tight finances.

[Steve]

I agree the unlimited ones are too expensive and probably not needed. But then I don't see the point in a fixed/reduced benefit with someone with good retirement savings (and if you don't have good retirement savings you can't afford the premium, though maybe there is a 'sweet spot' in the middle some advice mentions).

This is not like health insurance where someone with $1M needs to insure against a possible $2M in hospital bills. The costs are fixed and fairly easy to calculate (especially if you are considering a policy with a reduced benefit that limits maximum payout).

And unfortunately, as someone who has a lot of experience with privately obtained health insurance, I have to agree with Matt that I can count on a pile of money saved from the premiums a whole lot more than an insurance company's decision as to whether they are going to actually pay out or not.

[Jeffinwesternwa]

Don't forget insurability issues! Health generaaly does not improve as you age, thus, getting the policy could be impossible IF you wait to long (or cost more). There is no "government dole" for LTHC issues. The indigent can't afford it, the rich don't need it. Everybodybody else better have a plan and LTHC is the usual route. Buy it like other insurance, a high "deductible" (elimination period) and a reasonable benefit (maybe $100 or $150 day) is fine. After all, you won't be spending your retirement nestegg on "living the life" if you are collecting on LTHC, so those assets can help pay for LTHC issues. Insurance and policies are complicated to some but, it's all in the policy. I was an agent/planner for 16+ years. Also, buy from a QUALITY company and comparison shop!

[Erik]

Glad you posted this as I was just discussing this situation with my Mother-in-law. She is divorced and about to turn 69. Her current retirement monthly budget is around 5k/month.

My sense is that she fits into this middle zone where she has enough assets but not enough to self insure for life. The three to five year plans don't make much sense to me for her situation as she can self insure for that. (Assume her assets are around 2M)

I suggested that she get a smaller daily dollar amount as a partial insurance but one that would grow over time. To give you a ballpark of prices the annual premium for a lifetime benifit of $200/day with no inflation adjustment is around 6k/year. The $150/day with 3% inflation protect is also close to 6k/year.

I suggested she check out the $100/day plan with a 5% increase a year and get a price. This will take a long time (14 years) to get to $200/day but it has a big advantage in the really long term. I don't know the cost of this yet. My thinking is that she is trying to protect a possible gap in expense and that she is better off with a smaller amount that will continuously fill the gap. (I realize that 5% may still be less than the cost increases, but that was best percentage I saw.)

I'd love to get your thoughts on this.

[Catherine]

Very timely.

I'm 44, my spouse is 49, and I've been looking into getting a policy this year.

Like everyone else, I plan to be fit and active into my tenth decade then pass away peacefully in my sleep. We also plan never to get rear-ended by drunk drivers or side-swiped on the highway by some kid who was texting, but we still carry car insurance.

Most families include a member who has had a stroke; a hip fracture or case of demetia that required expensive care for an extended period of time. These events can completely exhaust a family's resources and often leave a care-giving or surviving spouse living in poverty.

So, yes, I'm buying us a policy.
As with my homeowners and automobile insurance policies, I hope I never need it.

[FMF]

Erik --

Your thinking seems correct to me, but as stated above, I'm still trying to sort things out myself. Not sure if I'm the best judge of what's good or not.

FYI, I think that many reading this blog will eventually be in your MIL's situation -- in that mid-wealth level where you can cover many of your expenses but not all.

[Kurt @ Money Counselor]

This is a complex issue. Buying LTC insurance well before it's likely needed strikes me as buying auto insurance when one doesn't own a car, so it would be available and affordable if I buy a car. I smell an insurance industry rat behind such advice. But maybe I'm being a bit too cynical.

[Carol]

I'm a 64 year old single woman, and for me it was a no-brainer. I bought a CT "partnership" policy through work at 54 and pay only $94.00 per month. The worth of the policy increases 5 percent per year. As a social worker, I wouldn't depend on T19. There is a difference in care between private pay and the state. A LTC policy buys you choices unless you have to have a boatload of $ to self-insure.

[AndrewB]

We already spend 10% or more of my income in insurance products: landlord insurance for several properties, car insurance for 3 cars, health insurance, cancer coverage premium on health insurance, dental insurance, short and long term disability insurance (spouse), term life insurance for both of us, umbrella insurance, and homeowners insurance. We are in our early 40s. I'll look for Long-Term Care Insurance when we enter our 50s and drop the term life insurance plans.

Or we could migrate to a 3rd world country before we get too ill to travel and hire a live-in care assistant to avoid the Long-Term Care Insurance, sell the properties and cars here and have a lot less insurance to pay!

[Jason @ WorkSaveLive]

This is a great post! I understand I'm biased because my job involves helping create retirement plans for people and LTCi is a part of that!

Being factual though (and not biased) LTCi is designed to have a person pay about the same amount of money whether they start the insurance at 45 or at age 60. If that's the case then what is the purpose of waiting and leaving yourself vulnerable to the risk of something happening thus becoming uninsurable.

It's very difficult to get LTCi so getting it early is a bonus.

As a rule of thumb we use $4,500/month benefit for 3 years with an inflation mark of 5%. I'd suggest not using the 3% inflation because LTC outpaces normal inflation.

Furthermore, I wouldn't use the daily benefit and go with the monthly benefit. It's really the same but there are a few benefits to go the monthly route.

[Jason @ WorkSaveLive]

After seeing Erik's comment I will add a few things:

After age 65 it becomes very difficult for most people to fit LTCi in their budgets and justify it. The ideal window is between ages 50 and 60.

[Jake]

Great post. One thing to remember is the tax advantages that LTC offers under a tax qualified LTC plan. Remember that in either of the 4 scenarios below, benefits are never taxable. Your state may also have a state income tax credit for a qualified LTC plan.

Individual Taxpayer - if you purchase a tax qualified LTC plan according to 7702(b) of the IRS code AND you itemize deductions, then a portion of the premium is deductible. The older you are the more you can deduct. In 2012, the limits are:

Under age 41: $350
41 - 50: $660
51 – 60: $1,310
61 – 70: $3,500
Over 70: $4,370

Remember however that this is subject to the 7.5% of AGI medical expense threshold.

Self Employed Individuals - A self employed individual is different from an individual. You can take the amount of the premium as a deduction up to the limits discussed above as long as you made a net profit--your medical expenses do not have to exceed 7.5 percent of your income. You can also include your spouse and dependents and it is not necessary to meet the 7.5% threshold.

S-Corp, Partnerships & LLCs - More than 2% owners of S-Corps, Partnerships and LLCs have the same tax treatment as a Self Employed individuals. The partner, member or shareholder/employee includes the LTC premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium. It is not necessary to meet a 7.5% AGI threshold. However, if you are an employee of one of these companies and the company pays for the LTC premiums, then the company can deduct the full LTC premiums paid on their behalf.

For example, in a sole proprietor or a partnership situation, the owner/partner who has a spouse who is a true employee can deduct the actual (full) premium for that spouse's policy.

C-Corp - If you are a C corporation business owner you have definite tax advantages. Your corporation can deduct 100 percent of your LTC premium as a business expense. There is no 7.5 percent threshold to meet and it is not limited to the age based eligible premium. You can also purchase tax qualified policies for select employees without encountering a discrimination issue.

So in a C-Corp that purchases tax qualified LTC policies:

1. The business can deduct the LTC premium as a business expense.
2. The employee pays no income tax on the LTC premium paid by the business on his/her behalf.
3. The employee pays no income tax if or when benefits are paid from the policy.

The reason for all the tax advantages, if you think about it, is that the over 65 population is the fastest growing in the nation and that the government is entirely unprepared to support or pay for LTC for all of these people.

[Old Limey]

I'm 77, my wife is 79 and we decided years ago never to buy LTCI. We have lived within our means our whole life, have always saved, and are still saving today since it would be impossible for us to spend everything we have coming in. Our income investments are now above the mid 7 figures and earning right around 5% tax deferred and tax exempt so we feel perfectly capable of handling everything ourselves without the need for an insurance company. By the way, we got off the boat as newlyweds from England in 1956 with $400 between us, have raised three children, had a ski cabin at Lake Tahoe for many years, have vacationed all over the world, live in a beautiful home in an exclusive neighborhood, and had a great life so far and could never be considered misers. When I retired from being an aerospace engineer at the age of 58 in 1992 my salary was $72,500, my wife had a part time job with a salary of $13,500.

I owe our unanticipated success to teaching myself to be a very good and very active investor, and making 1800% during 15 great years, right up until October 2007 when the markets gave an unmistakable signal that it was time to go 100% into bond investments. We have also lived quite frugally compared with most native Americans and never showered our children with money, as seems the custom today. They each had multiple jobs before leaving home. Even today I take care of all investment decisions, our landscaping and cars and we do all of our own housework. We also don't have any life insurance.

I have to say however that there are great times to have been born and there have been terrible times to be born since none of us have control over huge outside events such as recessions, depressions, bad economies, bad markets, bubbles, and wars. In retrospect we both feel incredibly lucky.

[Catherine]

@Kurt -- I'm no rat, not in that industry at all.
But isn't the point of all insurance to buy it before you need it?

My thinking is shaped by the experience of those I see around me dealing with the financial implications of disability and/or chronic health issues that began in mid-life. While I'm hoping I'll be lucky enough to skate through the second half as fit and healthy as my Mother is, I see the reality of many of her peers who are not so fortunate. Luck is not a financial plan.

[Erik]

@Jake - you make an interesting point about taxes. Thanks. Along that same line, what if most your retirement accounts are in a IRA and taxes will be due when taking out the money. For example, take out 80k a year to generate 60k of available income which turns into 5k/month.

If this person did NOT have long term care and needed 8k/month in the new scenario (say 6k medical and only 2k for the rest in a reduced capacity). Could the 6k of expenses be deducted and thus greatly reduce the tax burden? 8k/month * 12 is 96k/year which isn't that much more than the 80k but using a similar tax rate 96k would require 128k/year of pretax dollars and that is a much bigger issue.

If you look at LTCI as an incremental expense then should retires consider the incremental expense with favorable tax consequences? In other words budget goes up by 2k more a month but it really only need to withdraw around 1k/month since a good deal of expenses will now become medical and therefore dedcuctable. Does this type of analysis make sense when deciding on LTCI?

[jim]

Longtermcare.gov has a lot of info on the topic.

LTC makes sense if you are in the group of people who can afford a $2-4k annual policy but can not afford to self insure. I think it makes most sense to buy it in your late 50's or early 60's. Very very few people need LTC in their 40's so thats a low risk to insure against.

I don't know if Mark is serious or just ranting.
But I would not plan on relying on government paying the bill unless you really can't afford anything better. Medicare doesn't cover nursing homes generally and medicaid requires you to be completely broke to qualify. If you do end up destitute and can get on medicaid then the type and quality of care is up to what the government decides to pay for. But this is basically just the 'I'll go bankrupt' plan which is never a good plan financially. Course if you really can't afford a LTC premium then medicaid is what you'll have to rely on.

[PennySaved]

I have LTC insurance through federal employee plan. I think I pay about $2500 per year and I am 55. I am also spouseless, childless and have no relatives living anywhere in my part of the country.

When I get to older age, I may go into a continuing care retirement community. The community has independent living, assisted living and nursing home all in the same complex. You have to be able to live independently when you first enter the community. You pay a large upfront fee (maybe a couple hundred thousand) and then a monthly maintenance fee. I could use the sale of my condo to pay the upfront fee. One of my friends who was checking out this place for her mom was very impressed with it. She said if one has long term care insurance, then the upfront fee is reduced. You live in your own apt, then if you need assistance later you get it in the same place. Then if you need nursing care, you can get it there at the same complex. Anyone else know any details about how LTC insurance works with continuing care facilities?

My father died of Alzheimers at 86, but most of his care was at home with my mom taking care of him. He finally was put in a nursing home, but only lasted about a month.

[PennySaved]

Regarding getting Social Security disability, I don't think it is that easy to get. Most people are rejected at first and it takes a long while to actually get the benefits. Especially now because I read there is a backlog with all the extra people trying to claim benefits due to the recession.

My ex sister-in-law has MS and it got so bad she had to quit working (vision problems and extreme fatigue). She applied for SS disability and was denied. She had to get a lawyer to help her through the process and it took over a year to finally get approved. She gets a whopping $680 per MONTH. She scrapes by with financial assistance from her mother who is in her 80s. So don't think SS disability is going to be the easy solution.

[JJ]

We bought LTC in 2003 when we were in early 40s. We chose the 10-year payment set-up (annual payment $4K so our total cost is $40K). Up to now, we are still teased by our friends for buying it. People do have different views on this!

[Jake]

@Erik - Sorry for the delay in getting back with you.

You make a good point to consider when projecting long term care expenses in retirement. Assuming you were drawing from a tax deferred or qualified account (like a Traditional IRA or a 401K) in retirement to pay long term care costs, those expenses would be deductible as a medical expense as long as they exceed 7.5% of your AGI.

But even with the deduction, the cashflow would still need to exist from your retirement accounts. So using your example, you would need 6k per month or 96k per year for long term care expenses. You would deduct the 96k to the extent it exceeded 7.5% of AGI. However, assuming a 4% withdrawal rate, you would need around 2.5M in principal just to pay these expenses (you can debate retirement withdrawal rates to no end - this is just an example). And that is before you paid any other retirement costs that would come up.

The main draw for LTC insurance is to protect yourself and your spouse from drawing down retirement assets or worse having to rely upon the government for your care.

The real tax benefit comes when you can get an employer to pay for the cost of an individual LTC policy.

As @JJ mentioned, many companies have a 10-pay policy that is essentially "paid-up" after 10 annual payments. Say an individual has a 28% effective personal tax rate and is buying a 4k annual premium 10-pay LTC policy on himself and his wife (both in their 40s). If the individual has employer pay for it, he pays no income tax and the employer can deduct the cost of the premium. Had the individual purchased it with after-tax dollars, he would have to earn (pre-tax) $5,555 and then each individual would only have been able to deduct $660 ($1320) total to the extent it exceeded 7.5% of AGI. As the tax code stands now, it just makes more sense for a business to pay for it rather than an individual, especially younger individuals.

Hope this helps.