Long-term care insurance - are you at least 40 years old? Keep reading...
September 30, 2022
There used to be a time when people would think about buying long-term care insurance when they retired. There used to also be a time when insurance companies wrote policies for sixty-somethings. Then a funny thing happened: people started to live longer. Worse, at least from the perspective of an insurance carrier, the people who lived longer were people who were long-term care policyholders.
Insurance companies were always happy to write long-term care insurance because they made money from those policies, especially when policyholders died without ever requiring care. But when policyholders lived longer lives and collected on those policies, the insurance companies paid out far more in claims than they collected from premiums.
Recognizing that longer life means less profit, insurance companies have been feverishly raising premiums on policies they wrote years ago. They also tightened underwriting for these types of policies including no longer writing long-term care policies for people in their 60’s (or even late 50’s). In fact, some companies exited the business entirely. (Approximately 50,000 long-term care insurance policies are sold annually, down from 740,000 sold in the year 2000.1) For those still writing coverage, the goal is to collect higher and higher premiums for as many years as possible prior to a claim.
What’s the risk of not having coverage?
The risk is that a carefully cultivated financial plan, implemented over decades, can easily fail if you or your partner requires extensive (read: expensive) care. It’s a risk that many people are ill-prepared to address. For some reason, many don’t even take the risk seriously.
An assisted living facility can easily cost $10,000 per month (or more). Medicare will pay zero, and Medicaid won’t contribute until you (and your spouse) have expended all your funds. In blunt terms, the risk of not addressing potential long-term care needs is running out of funds long before you (and/or your spouse) run out of years.
The Center for Retirement Research at Boston College reports that for people age 65 and older: “…about one-fifth of retirees will need no long-term care support, and that one-quarter are likely to experience a severe need. In between these extremes, 22% will have low needs and 38% will have moderate risk.”
Self-insurance is an option tied to your assets. Obviously, the more assets you have, the better the chance you’ll be able to self-fund home-care aides or the cost for more extensive care. But if you don’t have an excess of wealth, then funding an extra household (e.g., one spouse remains at home while the second moves to a community for care) is usually a burden most families can’t afford. The dollars may work for a while, but at some point, assets are depleted. As noted above, Medicaid only starts to pay for assisted living and other residential care when the assets of both spouses are effectively depleted.
The latest iteration: Hybrid long-term care policies
In order to fill a growing void in the marketplace, insurance companies have developed a hybrid insurance product, which is a combination of life and long-term care insurance. While the policy often includes a significant up-front premium payment, some policies include large annual premiums for the first 10 years. In return, the policyholder typically receives a death benefit approximately equal to premiums paid along with a monthly benefit to cover long-term care.
One attractive feature of a hybrid policy is it addresses a years-old complaint that insurance companies keep all the premiums should a policyholder die without ever utilizing any benefits from his/her long-term care policy.