Why You Don’t Need Long Term Care Insurance

The following is a guest post from Neal Frankle.  He is a CFP in Los Angeles and the owner of Wealth Pilgrim. Since much of the discussion we've had recently about long-term care insurance has been rather positive (as in "we all need it at least in part" -- see Good Advice on Long-Term Care Insurance), I thought it was good to hear from a different perspective.

There is so much discussion (and hype) about long term care insurance these days. It makes sense to take a hard look at this and see if you really need such a policy or not.

Most financial professionals tout this coverage even if they don’t sell it. That’s because it can be dangerous (for them) if you need it and they don’t suggest it.

But the reality is you may in fact not need this expensive insurance. Let’s take a look to determine if this insurance is a good fit for you or not. To do that, let’s first let’s define our terms.

What is Long Term Care insurance?

If you become ill or disabled (in a very defined manner) the insurance company will make payments to you. The amount they pay has nothing to do with what it costs you for your care as I’ll explain in a moment.

How do you qualify?

Each policy is different but they all spell out what “qualifying events” are when you ask for an LTC insurance quote. Typically you must be unable to perform a certain number of “activities of daily life” such as walking, getting out of bed, bathing etc. If a doctor notifies the company that you are unable to perform 1, 2 or 3 of those activities of daily life, the insurance company will start paying you.

How much will they pay and for how long?

When you purchase a long term care policy, you tell the insurance company how much coverage you want in terms of daily benefits. The greater the daily benefit you want (and the longer you want that benefits to continue) the greater the annual premium you’ll pay.

As I said, once you qualify for benefits, they will send you monthly checks regardless of what your out of pocket expense turns out to be. Once you no longer qualify (because you either recover or pass away) the payments stop.

Can your premiums rise?

Yes and no. The insurance company can’t raise rates just because you get older or sicker. But they can raise rates for everyone in a certain age group – and this happens more and more often. I have clients who bought this coverage years ago. While the benefits have not increased, the premiums have gone up by a factor of 4.

The good news is they can’t raise rates whenever they want to. Depending on the State they operate in, the State Insurance Commission usually has to approve these increases.

Who shouldn’t buy long term care insurance?

A recent article I read in Investment News Magazine quoted the American Association for Long-Term Care Insurance. They reported that 32.5% of the people who make claims are men and 67.5% are women. So if you are a man it’s a long-shot that you’ll ever make a claim. But if you are a woman, coverage might make sense. If you are a couple and you only have enough money to insure one of you, it’s probably best to cover the woman.

But the analysis doesn’t stop there.

According to those same people at the American Association for Long-Term Care Insurance, the coverage doesn’t pay off too well. They reported that over 8 million people own this insurance, but only 180,000 people receive benefits. According to my calculations, that means a bit over 2% of the people who pay for policies make claims.

The industry goes on to tell us that one in four people age 65 or over are going to need long-term care at some point before they die. I don’t know if that’s true or not. But just because you might need long-term care assistance doesn’t mean you need long term care insurance.

Many people who need care get it from family or friends. Others die quickly after they become ill. That could explain why so few people actually make claims.

Other Reasons Not to Buy Long Term Care

If you have a sizeable estate and don’t care that much about leaving a pile of money to your heirs, this coverage may not be a wise choice. Likewise, if you are have enough retirement income that would pay for the care you need, why not self insure?

If you have very limited income and assets, Medicaid will likely cover you. Anyway, it will be difficult for you to hold on to the policy if the company raises rates in the future.

Forbes recently reported that only 5% of those 65 and older will spend more than $250,000 on long-term care costs. Maybe that’s why the Society of Actuaries concluded that people with less than $250,000 or more than $2 million probably don’t need it.

If you do decide to buy this insurance, it’s important to buy quality. It’s easy to find inexpensive term life insurance from high quality companies. With long term care, the field is much narrower. You’re going to have to pay significantly more for this coverage if you work with a top rated company but it’s worth it.

What is your position on long-term care insurance?

Comments

[Nashville]

Lots of people pay for car or homeowner's insurance all of their lives and never file a single claim. Likewise with umbrella liability insurance. You pay for the protection just in case you might need it. That why it is called "insurance". So, not needing it because you 'probably' won't need it doesn't wash with me. LTC insurance is rather expensive so it really boils down to affordability.

My dad had a policy and is receiving benefit payments from it right now meaning almost no out of pocket expenses for him. Otherwise, he would have had to sell his house to pay for it. My mother-in-law had a policy and used it for short time before she passed on. I expect to go before my wife and I will do whatever reasonable to make sure that she has enough money left to live comfortably and worry-free after my illness or after recovering from one of her own.

[Mark Patterson]

If I need long term care, do I want to force my children to provide it? No. Do I want to force my wife to spend down all of our assets so that I qualify for Medicaid? No. Is it more likely that I will to need long term care than my house will burn to the ground? Yes. Statistics shows that 65% of Americans over age 65 will need LTC at some point in their life? Statistics also show that once you hit 65, you have a 40% chance of spending at least some time in a nursing home. This is why I bought LTC insurance for me and for my wife.

[Raymond Lavine]

The comments of others and what I write will be similar. We own other insurance because we want to avoid the risk of a loss which may or may not occur.

Are we unhappy that we owned the insurance? The probability of needing long term care insurance before 65 is appproximately 40% and increases as we age.

A few additional thoughts:

1. Why is $2 million in assets the point where not having a long term care plan sufficient? How much money is being produced from this $2 million? If you had to use some of the principal to pay for care giving expenses how would that effect your cash flow and your estate? Would there be capital gains issues?

2. Own a plan which will cover care giving expenses for 1 or 2 years. There are plans available in most states for short term coverage if you feel you will not need care giving services for any length of time.

3. Many people live alone. That does not mean they are alone or want to be alone. If they have sufficient resources for care giving services, where they live (home or in a care facility) will be pleasing for people to visit or for people to go out and visit others or to travel.

4. Being a caregiver is hard work. Receiving care does not mean you should live an isolated, lonley, or cannot do anything life. I see people in wheelchairs, walkers, electric chairs. They would qualify for long term care but they get out and do things. I see them in commercial areas, restaurants, markets, movie theatres, festivals, live music. They can get out and do things if they have people to help them.

This is what long term care insurance or if you have sufficient funds to set aside a reserve fund to pay for those services. The affluent understand that taking a small percentage of your assets to own a long term care plan will preserve the rest of your estate along with preserving your cash flow for your life style.

[Dr. Robert Weed]

The average age of someone buying Long Term Care insurance is in the mid 50's so most of them won't go on claim for a while. You should be smart enough to understand this fact.

The federal government tells us that if you reach the age of 65 you will have a 75% chance of requiring some form of Long Term Care service before you pass-away. They also say many people who need care are under the age of 65 as medical science keeps us alive from major health events and accidents.

Most Long Term Care insurance policies have not had multiple rate increases. They have been selling these since the 70's, I wish health insurance and gasoline were as rate stable as Long Term Care Insurance.

You add the Partnership protections available in most states, providing dollar for dollar asset protection, affordable Long Term Care insurance appears to be the best way to plan.

When I purchased my policy I went to www.completelongtermcare.com and www.aaltci.com and then spoke to a specialist who represents the top companies. I bought an affordable plan and now have the peace-of-mind knowing my family won't have this burden.

[Matt]

Look at long term insurance as to how quickly or slowly or not at all you want to go bankrupt.

Have none and you will got bankrupt quickly if you are at the extreeme. Slowly if you have minimal complications. Then if you are fortunate the gubamint will take care of you once you are bankrupt.

Have some will help fend off the expenses while tapping your nest. This will drain your assets slowly.

Have ALOT and you protect yourself and you cover you nest. However at what cost? It it worth it?

Seeing that the average person can't even come up with $20 a month worth of savings, I find it hard to believe that someone would even spend $10 a month on insurance that they hope to never need.

Seeing my employer had a company come in 5 years ago to talk about this I was 45 then and totally disinterested. Now that I am almost 50 I listened and started with a simple $1000 a month benefit for three years for $9.10 a month. In 5 years I might look at it again and see where I am at and then I may up it some more.

Like Yoda said "The future is clouded and hare to see"

[Roger @ The Chicago Financial Planner]

As a fellow financial planner I agree with many of the points Neal made. Long-term care insurance, like any other insurance should be purchased based on the potential need for the coverage and how much of the cost of the risk (the need for care in this case) the insured is willing and able to bear. In this case the cost of the premiums needs to be factored in as well.

One insurer, John Hancock, has received a waiver here in Illinois (I'm not sure if this extends to other states) that allowed them to put some hefty premium increases in place this year.

I generally have this discussion with all clients in a certain age range (early 50s and above) and we make this decision as part of their unique financial situation. Some opt not to purchase it, some purchase a limited amount and assume they will cover the rest (if needed) from their personal assets, and so on.

[Apex]

I am generally not a big fan of this type of insurance and don't know if I will buy it someday or not. However, there is a major mistake in the calculations in this article that has to be pointed out for accuracy sake. Dr. Robert Weed alluded to it in his comment.

The author cites a 2% usage rate based on the number of people holding policies and the number making claims. This is a terribly bad use of math. It's so bad that it makes one wonder if it is purposely misleading. LTC insurance has become much more popular of late so most people currently holding policies have recently bought them and are in their 50's or early 60's, an age prior to most people needing it. Many of those people will eventually use it.

The only way to calculate the percentage of people that make claims is to examine the records of all the people who have died in say the last few years and then calculate what percentage of those that had policies made claims.

I assure you that number will be much higher than 2%.

[Elle]

I'd like to see the Investment News article, but the link is broken. Please update this.

[jim]

"over 8 million people own this insurance, but only 180,000 people receive benefits."

Might be hard to draw any real conclusions from those two data points. For all we know 7 million of those policies are just 1-2 years old.

[jim]

' Society of Actuaries concluded that people with less than $250,000 or more than $2 million probably don’t need it.'

This part I do agree with in general. People with low or high assets aren't the best candidates for LTC. If you have little money then its too much of a burden to afford LTC premiums and worst case you can fall back on the medicaid safety net.

If you are a mult-millionaire then you can self insure. Still I can certainly see a good reason to get LTC even if you're high net worth. It helps mitigate and plan for a risk.

Also I think if youre less than 50 years old then LTC isn't really necessary. There is low risk you'd use it before you're 60 or older. Premiums are lower in younger years but I assume it adds up to similar net present value either way. i.e. you can pay thenm $1000 for 40 years or $2000 for 20 years.

[Catherine]

Anyone else think that the closing line somewhat contradicts his entire thesis?
"You’re going to have to pay significantly more for this coverage if you work with a top rated company but it’s worth it." Sounds like, you don't need a home theater, but if you get one, go with the 72 inch screen because it's worth it.

I'm in the camp that thinks it is wise to have LTC coverage. If a couple can only afford one policy, I think it is more important to choose based on factors other than gender, ie.. whose health is questionable, who has the family history of heart disease, who is older. My interest in having coverage is so that if one of us needs care while the other is alive, we don't exhaust our marital resources as quickly. Also, I think it is more crucial to have coverage in your fifties and early sixties. These should be peak earning years for most people. But if you have a qualifying event in those decades, you are also suddenly out of the workforce. Instead of topping off retirement savings, you may face a rapid and unexpected spend down.

[Neal]

The facts that are getting thrown around in the comments are so wild I don't know where to begin to respond other than to ask readers to actually read the facts stated above in the post.

1. People are assuming that sales of LTC have ramped up so the 2% claim number (provided by a pro LTC group) is misleading. They have the burden to show the sales skew the numbers. I have no reason to believe that sales have exploded in the last 2 years.

2. People above cite stats of 65% to 75% of our populations needed LTC. They do not cite how long or at what cost. Yet that data is needed in order to make an intelligent decision. Often, people throw data points around in a desperate attempt to prove that what they did is right rather than try to understand the reality of the situation.

3. Dr Weed talks about "most people" and "most companies" yet I've worked with clients for 29 years. Every single client who owns a policy has had to deal with significant price increases. None of those people have yet to make a claim.

4. Again, I just don't know where people get the "we know 7 million of these policies were sold in the last 2 years". LTC has a very high consistency rate . Meaning, once people buy the rarely let them lapse. I would say that most of the policies out there are older.

[John Egan]

The headline of this article is a bit misleading. Yes, long-term care insurance may not be right for you, but it also may be a great investment. You really have to consider your budget and your life circumstances in deciding whether to buy long-term care insurance. Sure, it's not for everyone. But when you consider the thousands of dollars that long-term care can cost in just one year's time, long-term care insurance may be a savior.

[Ann Byrne]

I have longterm care and have had it for several years. It is over $100 month. I am 71, am healthy. I intend to read my policy again. If I were to be ill, I am afraid that the $150 a day I could receive (if I couldn't walk, etc. etc.) might not be enough with today's rising healthcare rates. I think I would be able to retrieve $5,000 if I decide to cancel it. What are your comments.

[Old Limey]

Ann
I'm 79 and do not have LTCI however I have a very large investment portfolio that generates a large annual income, in addition to receiving a pension and SS. I have been married for 56 years, have 3 children, one daughter in particular with whom I am very close lives nearby.

In order for someone to make an intelligent and useful appraisal of your circumstances they would require full details of your total financial picture. Like you, I am very healthy now but one's health can change very quickly. $4,500/month is plenty if you only need a little help, but it is nowhere near enough if you are unable to drive and have a debilitating and worsening health condition such as Alzheimers or Parkinsons.

[Cliff Witherspoon]

Anyone ever filed a claim for LTC benefits? Dealing with that BS with John Hancock as well as dealing with a dying mother (from cancer) absolutely sucks. The claims department has one objective: deny claims. Only when you pull an attorney into the mix to enforce the contract do they finally start paying up. Good luck for those of you who ever have to file a claim (especially with John Hancock).