There are so many considerations when deciding whether to purchase long-term care insurance (LTCI), it’s difficult to know where to begin. Some experts say consumers should approach the question like any investment—in a businesslike, unemotional manner. For others, LTCI offers peace of mind that everyone should have, it’s just a question of “how much?” and “when?” to sign up.
First, some basics. There are many variables to consider, and most of them play into how much consumers will pay in premiums each month.
- What kind of policy to buy?
- A cash policy that pays the benefit no matter how much the consumer spends, as long as they meet the qualifications
- An indemnity policy that pays only for the days on which care is used
- A policy that reimburses consumers only for documented expenses
- How much insurance to purchase—in terms of elimination period or deductible, daily benefit amount and maximum length of benefit period?
- What features will the policy have? For example, will it cover only institutional care, or also home care? Will it have a set benefit, or inflation protection? Will it have a level premium or graduated? How many “activities of daily living” (ADLs) will have to be lost before coverage begins, and which ones are considered?
Even after these questions are answered, policy pricing will be contingent on the age and health of the applicant, family health history, residence location and other underwriting criteria.
To Nancy Curtin, long-term care specialist and president of Smart Future, LLC, it’s a question of choosing the right policy. Because it’s such a complicated decision, she suggests that potential purchasers work with a long-term care specialist (CLTC) and “someone who has your best interests at heart.” She notes that policies can be obtained from “lots of people who don’t really care about you and don’t really know how to set them up properly. You should look for someone with a planning background, a CLTC, and someone who cares about you and can help you put together the right moving pieces to get the plan that’s right for you.”
Most people should have some insurance protection for long-term care, Curtin said she believes. “Even if you’re 50 and in really good health, you need to consider that 30 years from now the cost of long-term care will be about $240,000 per year,” she said. “There was a time when you could count on people to come over and help you with care. For most of us, there aren’t going to be people to care for us the way there used to be.
“You either need to have private insurance, or a nice big nest egg outside of what you plan for your retirement income. Or, you hit the bad road and get on Medicaid,” Curtin said.
She said she doesn’t advise that people invest the money they would have paid in premiums because this tack doesn’t offer any guarantees. “If people say, ‘I’m going to invest that $2,000 or $3,000 a year,’ the return is market-driven. Then, if the market takes a dive, you have a lot less money for care than you had planned on. Insurance products are not market-driven, they are guaranteed,” she said.
‘Very expensive nothing’?
David Mendels, CFP, an investment adviser with Creative Financial Concepts in New York, looks at it differently. “I look at it on a case by case basis but I haven’t seen one yet where I thought it was worth it,” said Mendels, who is licensed to sell LTCI but hasn’t sold a single policy.
“When you start balancing the cost of protection against what you’re getting, you may end up with very expensive nothing,” Mendels said. “To get optimal protection is very expensive,” he said, describing “optimal” as a policy with full inflation protection, lifetime care and top-dollar coverage. “As you start coming down off of that, you end up providing protection only up to a point. That may not be sufficient to keep you from going broke, and all you’ve gotten is the privilege of going broke more quickly.”
Mendels said wealthy people probably save money—lifestyle spending, such as travel and entertainment—when they go into a nursing home. For those with little, Medicaid will pick up the cost of care. For the vast population in between, “if you’re not going to do the job adequately, then you’re just wasting your money,” he asserted.
“As a practical matter, if it doesn’t do enough, it doesn’t do anything. If I buy coverage that’s going to pay $300 per day for five years and I go into a nursing home that costs $1,000 per day, then my family has to pay $700 per day and what good does it do them?”
Where it probably makes sense, Mendels said, is for a couple who are concerned about “the spouse who would have to become impoverished caring for the other one.” He said he believes an interesting option for them may be the Partnership Programs offered by some states to allow people with long-term care insurance to hang on to some of their assets and still go on Medicaid.
Capital at risk?
Randy Hallier, CFP, president of Retirement Plus in suburban Kansas City, said his firm starts working with clients on long-term care planning between the ages of 50 and 55. “It’s very straight-forward and commonsensical,” he said— businesslike analysis that is as scientific and unemotional as possible.“For people who have saved and accumulated, and can comfortably retire, they have to evaluate whether that capital is at risk if they find themselves in a long-term care situation,” Hallier said. “Long-term care insurance is an option for people who haven’t saved enough to pay for their retirement years.”
Retirement Plus’s analysis looks at a client’s income first to cover essential spending such as food, shelter, clothing, and health care, and then looks at the client’s variable spending—optional items such as travel, gifts and charitable donations. Like Mendels, Hallier said most of the lifestyle spending “goes away” when a client enters long-term care. Using a computer program to run inflation-adjusted projections, his firm identifies clients who will likely deplete their assets—typically in their 70s—in a long-term care situation and recommends that they consider purchasing an LTCI policy. About a third of his clients become statistical candidates to purchase the insurance.
Hallier said LTCI policies are particularly attractive to people who want to protect their assets for their heirs. “People often respond with the idea that they don’t want to sacrifice a portion of their estate because they want to leave it to their children and grandchildren, or a charity,” he said.
For some of these people, Hallier said, “if the person had the concern that they would spend an extraordinary sum for health care, there is a plausible argument to purchase an adequate amount of life insurance instead. If you drain your capital budget, you can probably refill it that way.” This strategy is not without pitfalls, however—such as tax issues related to ownership of the policy and who has the obligation to pay the premium—“so you have to look at it very closely.”
While Retirement Plus talks with clients about LTCI with clients in their early 50s, other long-term care specialists believe the discussion should begin earlier. Curtin, for example, believes everyone should have a policy.
Rachel Faiga, CLTC, a long-term care specialist with Long-Term Planning Associates in Fairfield, Conn., agrees. A large percentage of people in long-term care situations are under 65, she says, noting that “the age of purchasers has decreased rapidly. People in their 20s and 30s are purchasing policies now. A lot of them have seen something catastrophic happen while they are young, and they are looking at options.”
Debbie Whitlock, co-owner of Sound Financial Partners in Seattle, said her firm starts the conversation with clients in their mid-40s, but the discussion changes when they approach retirement age—clients begin to call her and say, “we need to evaluate this now for us because we have seen the effect on our family.”
Whitlock said, “We’re facing a significant segment that hasn’t planned properly for their retirement” because they haven’t planned for long-term care and health care. “As you meet with those people you find they need to put another $200 to $500 per month into their retirement to cover those costs.”
Whether this should be done through prudent investments or insurance is an individual decision. In addition to available income to pay the premiums, policy options and costs must be factored in on the insurance side. On the investment side, it may depend in part on how reliable the individual is in sticking with the goal of putting the target amount away each month.
Whatever the decision, investors should look at the options and plan for the future, one way or another.