Broker Check

Long-Term Care Insurance: To Buy or Not to Buy

by Darren L. Zagarola, CFP®, CPA, PFS

As published in The Princeton Patch, September 27, 2012

Whether to buy or not to buy long-term care insurance is only one of the questions you should be asking. 

Long-term care insurance. For some, those words conjure up the way I felt when my sisters used to tell me the boogey man was not real – despite my belief to the contrary. Just like the boogey man, some people believe in long-term care insurance while others do not. It is a personal choice. My goal is to help you make an informed choice on whether to insure or not to insure by explaining the basics. Why listen to me? I don't sell long-term care insurance, so I can be unbiased.

Depending on where the statistics are obtained, anywhere from 60-70 percent of individuals at some point will require longterm care services due to disability or chronic illness. But what constitutes long-term care services? Long-term care services (LTC) provide custodial care for those that are unable to perform the basic activities of daily living such as dressing, bathing, eating, toileting, transferring and care for incontinence. The important distinction is that long-term care is custodial care – not medical care. This is an important distinction as most people believe they don't need LTC insurance because they have private medical coverage or are on Medicare. This is not the case. Per Nancy Morith, owner of NP Morith, Inc., Long-Term Care Planning and Insurance Brokerage, Medicare currently pays about 12 percent of nursing home care costs and it does not cover custodial care if that is the only care required. Correspondingly, long-term care insurance does not cover medical/hospital costs.

There are several important questions to ask when considering long-term care services. First and foremost is how to fund potential long-term care costs. This seems like a difficult question, but a person's answers are limited. They can self-insure or self-fund the potential future costs via their personal resources (investment portfolio, home). This means accepting all the risk for future costs. The benefit of self-insurance is that they will have no upfront costs (premium costs) and there is a 30-40 percent chance they may never incur a cost. However, if you are to require LTC, it will eat into one's retirement savings and reduce the assets available for a surviving spouse or partner to continue living in retirement, or may reduce an estate that was to be given to heirs. Another option is having Medicaid be responsible for the long-term care. I will leave that option's pitfalls to your imagination. The third option is long-term care insurance, whereby insurance is purchased prior to the need for care arising. In this case, for the cost of the annual premium, the insured protects their personal resources and transfers the risk to the insurance company. Most people opt for a combination of long-term care coverage and self-funding.

The most important long-term care decision does not relate to the policy or type of coverage needed. We ask clients to think about where they want to be cared for in the event that they require long-term care. Do they want to be in an assisted living facility? Do they want to be cared for at home? What type of facility? Where? Do you want to be near family or friends? These are important decisions to make prior to purchasing any insurance. If you haven't learned from my first three Patch posts, I believe in individuals having control over their lives. Most people would choose to be cared for in the comfort of their home. LTC insurance provides for care either in a facility or in the home, and includes the costs of nurses, physical, occupational and/or speech therapists. In most cases, the spouse or partner becomes the primary caregiver. This can become taxing on them and having the ability to have nurses or companions come to the home allows the caregiver time to themselves, which is very important to their ongoing health. LTC coverage also covers adult day care facilities. We recommend that long-term care plans be documented and discussed with families and possible caregivers. Once you have decided how and where you want to be cared for, then the appropriate level of LTC insurance should be obtained.

The next question is when should we insure ourselves? We typically do not recommend LTC insurance until someone is in their late 50s, unless they have a family history of illness that would require LTC at an earlier age (i.e. Alzheimer's, heart disease, stroke). By insuring at this early age, future premiums are reduced (providing cost certainty over the long term) because insurance is obtained while still healthy enough to qualify. Some companies offer group LTC as a part of the employee benefits package. This allows for the purchase of coverage at an earlier age and at lower premium costs. Typically, group coverage only includes partial home-care coverage, meaning that they would cover a certain amount for facility-based care and only a percentage of that cost (50 percent or 75 percent) for home care. In this instance, we may recommend that an individual supplement the group coverage with a smaller private coverage to assist in increasing their home-care coverage. Remember, the issue with group insurance relates to when a person leaves their job: it is either terminated or convertible to a private policy. For those who don't qualify for LTC insurance at termination, they would be self-insured. Those that qualify would pay a higher premium based on age and health. If convertible, the premium of the policy can be costly. Therefore, obtaining a private policy while healthy is the best option.

I do not need to tell you that the cost of health care in this area is significant and continues to increase at rates greater than inflation. Therefore, we recommend that LTC policies include inflation protection. Although the inflation rider adds to the cost of the policy, the effect of inflation on the health care costs could severely impact the adequacy of the coverage originally purchased. As part of the coverage, the policy holder will select a daily and a monthly coverage amount. This dollar amount is what the insurance company will pay for care on a daily or monthly basis. This is where the decision is made to fully or partially insure potential future costs. For example, a facility where you want to be cared for has a daily cost of $250. A policy covering the full $250 can be purchased, or one with a lesser daily maximum, say $200, can be selected. The policy holder is then self-insuring the difference between the $200 and the $250. The benefit is a lower premium cost on the $200 daily coverage. The length of time you want the benefit to cover your care (typically 2 – 10 years depending on the carrier) can also be selected. The average length of stay in a facility is three years. If a policy is purchased with a three-year coverage period, you would be self-insuring all expenses after the third year. The longer the length of coverage, the larger the premium of the policy. The average yearly cost of a nursing home is between $100,000 and $115,000, and home care can average more than $20/hour.

Long-term care decisions are very personal decisions, and are rarely made easily. They force us to discuss uncomfortable topics with spouses, partners and family members (I, for one, hate talking to my parents about any issues surrounding their aging and future care). These types of decisions are often overlooked in one's financial plan, as more time is spent on choosing individual investments. Nonetheless, it is important for a person's overall financial and personal well-being to work through the issues of “how,” and “where” to be cared for and to plan well in advance. Having control your financial and personal health is always better than having the decisions made for you.