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Nursing Homes & Nest Eggs: Is Long-Term Care Insurance Right for You? Part II

In Part 1 of this series on long-term care insurance, we discussed the basics of LTC insurance policies. In Part 2 we will discuss some of the pros and cons of LTC insurance and then list some key factors that should be considered when deciding if LTC insurance is right for you.

The list of reasons to purchase LTC insurance is quite short. There is really only one argument that can be made in favor of purchasing coverage, but it is both obvious and compelling: LTC insurance can prevent you and/or your family from being financially devastated by the costs associated with an extended stay in a LTC facility. As LTC costs continue to climb, having coverage to help offset these costs can give you peace of mind, knowing that you and/or your family will be largely free of the potentially devastating financial burden of extended LTC, should you ever need it.

Conversely, there is more than one argument againstpurchasing LTC coverage, and they, too, are quite compelling:

The cost for LTC insurance can be prohibitive.

LTC insurance policies typically have painfully steep premiums, and these premiums continue to rise for both new and existing policyholders.

LTC insurance benefits may be denied, regardless of need.

Many LTC policies have very strict eligibility requirements that must be met in order to pay benefits. If you do not meet these requirements, you may incur LTC expenses without ever receiving benefits to which you thought you were entitled.

You may never need LTC.

There is a reasonable probability that you will never need LTC. If you never incur any LTC expenses, then you will have paid a substantial amount of money into a policy from which you will never receive any benefits. Of course, there is some value in the peace of mind that you may have generated by having LTC insurance.

The LTC business model is under assault.

One of the largest remaining suppliers of LTC insurance, Genworth, is experiencing significant operational difficulties that may be emblematic of the industry. Their profitability is getting squeezed from increased LTC claims as compared to the cash flows coming in from the premiums. This trend magnifies the fact that potential price increases are around the bend for existing LTC insurance policies.

Of the negatives listed above, the most relevant issue is cost. Over the past ten years, many companies have simply stopped selling LTC policies, and holders of in-force policies have seen their premiums spike as a result of insurers’ inability to properly price these policies. Companies that are no longer issuing new policies are still required to honor existing policies, but, in most cases, they have been able to raise premiums (with the approval of state insurance regulators), often by substantial amounts and in many cases, multiple times. In recent years, some holders of in-force LTC insurance policies have seen their premiums rise by as much as 100%, and similar increases are likely to occur in the future.

Growing numbers of seniors, rapidly rising healthcare costs, and low interest rates have made it increasingly difficult for insurers to cover the costs of existing LTC insurance policies without hiking premiums for both new and existing policyholders. This trend of rising LTC insurance prices is unlikely to reverse in the foreseeable future because the drivers of the cost increases are not transient in nature. Therefore, the peace of mind provided by LTC insurance coverage is offset by high cost premiums that are likely to only go higher in the coming years.

While cost is far and away the most significant drawback with regard to LTC insurance, consumers should also consider the other drawbacks of LTC insurance. One can imagine the frustration that would result from paying premiums for years to ensure LTC benefits, only to be denied those benefits when are ultimately needed. Such cases are not uncommon. There have been a number of well-publicized cases in recent years of insurance companies denying LTC coverage to policyholders who had faithfully paid premiums for many years because the policyholder did not meet the insurance company’s unique requirements for making claims. In many cases, the insurance company makes its own determination (rather than a treating physician) of a policyholder’s eligibility for benefits, leaving the door open for denial of those benefits.

While LTC expenses can no doubt wreak havoc on a person’s finances, statistics indicate that the probability of incurring such devastating costs is actually surprisingly low. It is estimated that only 5% of people who reach age 65 will ever incur $250,000 or more in LTC costs over their lifetimes. Most people who do wind up needing LTC end up spending far less than this figure, making the protections offered by LTC insurance materially less valuable. And, of course, a significant percentage of Americans will never need LTC at all. One salient statistic worth noting is that nearly 70% of all seniors who go into a nursing home are discharged within 90 days. Given that the majority of LTC insurance policies have a 90 day elimination period, it is likely that a policyholder who does require LTC may not actually be eligible to receive benefits.

Is LTC Insurance Right for You?

Given the benefits and drawbacks, the question remains: who should have long-term care insurance? The answer is, of course, unique to each person’s specific situation. There is no “one-size-fits-all” answer. However, there are several factors that people should consider when deciding if LTC insurance is right for them:

Size of Asset Base

If you have a substantial amount of assets, you can “self-insure” against the possibility of needing LTC; self-insurance means that you can pay for these costs out of your own assets if it becomes necessary to do so. At the same time, if you don’t end up needing LTC, your assets remain your own rather than having been whittled away by expensive insurance premiums. In general, people with $1 million or more in assets should probably consider this “self-insurance” option, though other factors (such as family situation) may also make this the optimal strategy for investors with a more modest amount of assets.

Family Situation

Another factor that is key in deciding whether or not to purchase LTC insurance is your family situation. Do you have family members who are likely to be dependent upon your assets? Do you wish to leave a legacy for your children or grandchildren? Do you have children that are willing and able to provide care for you in the event that you need it? Are you comfortable relying on them for such care? These are all questions that should be considered by anyone who is contemplating purchasing LTC insurance. If you have family members who will be reliant on your assets in the future or you are planning to provide for a grandchild’s education (for example), you must consider the fact that a protracted stay in a long-term care facility could potentially wipe away the assets upon which your family will rely. On the other hand, depending on the situation, family assistance may be a viable alternative to a nursing home or assisted living facility that would allow you to potentially hold onto the majority of your assets

Health History

Another important consideration is health history – both your own and that of your family. If you have a history of health issues that could indicate a higher probability of ultimately needing long-term care, then clearly you should factor this into your calculations when decided whether or not to purchase LTC insurance. Similarly, if your family has a history of Alzheimer’s Disease or other genetically-linked maladies that may require long-term care, then you should factor this in as well. An increased probability of needing LTC significantly increases the value of an LTC insurance policy, so personal and family health histories should be carefully considered when deciding how to manage LTC risk. Do note, however, that insurance companies have started to factor family health history into their underwriting processes, so policyholders whose family histories indicate elevated risk are likely to see this reflected in their premiums.

This list of factors to consider is far from exhaustive, as each person’s situation is unique. However, it should help to get you started as you work through the process of deciding whether or not LTC insurance makes sense for you.

Developing a strategy for managing the risks associated with LTC costs can be a complex and daunting task. There are a myriad of factors to consider when deciding how best to protect your assets against the potential costs of LTC. However, having a clear understanding of how LTC insurance is structured and priced, as well as its benefits and drawbacks, should help you to work through the decision-making process in an informed and logical manner, ultimately leading you to the best decision for your personal situation.

This information is prepared for informational purposes only and should not be considered investment advice.  The views expressed are those of the author as of the date of this report, and are subject to change at any time due to changes in market or economic conditions.  Investing involves risk, including loss of principal.  There is no guarantee that the investment strategy discussed will outperform any other strategy in the future.

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