Not Everyone Needs to Buy Long-Term Care Insurance. Here Are Some Considerations.

Laveta Brigham

Five years ago, Julia Dobson of Auburn, Ala., bought a $400,000 life insurance policy that can be tapped early to pay for long-term care, should she ever need it. Her husband, Steve, declined to buy equivalent insurance for himself. Instead, he set aside $250,000 in investments to cover long-term care. […]

Five years ago, Julia Dobson of Auburn, Ala., bought a $400,000 life insurance policy that can be tapped early to pay for long-term care, should she ever need it.

Her husband, Steve, declined to buy equivalent insurance for himself. Instead, he set aside $250,000 in investments to cover long-term care.

There was some heated discussion before the couple made their decisions, says Steve Dobson, now 71 years old. “Usually, we’re on the same page about things,” he says. “This was something where we weren’t on the same page.”

A lot of seniors disagree when it comes to long-term care insurance. Half will need such care at some point in their lives and yet only a fraction carry insurance to cover the costs.

Medicaid pays for long-term care for lower-income individuals without other means. Wealthy people with at least $2 million to $3 million in assets, by contrast, usually can afford to pay for care out of their own pockets.

The dilemma comes for those in between—neither poor nor wealthy. The potentially staggering costs of long-term care—the average lifetime cost is $172,000, according to PwC—could upend their retirement budget or eat through money they hoped to leave to their children.

Are millions of Americans making a huge mistake by not buying insurance to cover these costs?

Not necessarily. Long-term care insurance isn’t like a lot of other insurance. For one, premiums are high because insurers know there is a decent chance that the policyholder will use it. What’s more, insurers usually cap what they will pay out.

Instead of buying traditional long-term insurance, more Americans are buying other insurance products for long-term care. Some like Julia Dobson, 68, are getting life insurance that allows them to accelerate the death benefit if care is needed. Others are buying hybrid long-term care policies that include a death benefit if the money isn’t spent on long-term care.

Such policies are attractive to people who want to build a legacy for their heirs in addition to defraying the expenses of a nursing home or of in-home nursing care. A life insurance policy with a long-term care rider also can make particular sense for people with health issues because underwriting tends to be more streamlined than for traditional long-term care insurance, says Bill Comfort, a North Carolina insurance agent who specializes in long-term care policies.

Still, life insurance or a hybrid policy is a more expensive way of paying for the care itself than traditional long-term care insurance, Comfort says. A cheaper alternative for people intent on steering money to their heirs is buying traditional long-term care insurance and a separate life insurance policy, he says.

Susan Elser, an Indianapolis financial planner, does a stress test for long-term care costs every time she prepares a plan for a client. She subtracts $400,000 from a couple’s assets—an amount she feels is adequate to cover most people’s needs—to see if their planned withdrawal rate is still sustainable. If it’s not, she asks if there are other ways they can prepare for this potential expense, such as downsizing their house or cutting spending.

“The nice thing about self-insuring is if they don’t need care, they don’t spend 30 years paying for it,” she says. “[B]ut some people, even if they appear to be able to self-insure for a long period of time, will purchase long-term care insurance because it gives them peace of mind.”

The Dobsons’ financial advisor, Maggie Kulyk, approaches the issue differently. She recommends that most clients buy long-term care insurance to cover at least some costs. “There are situations where a client has so much money relative to what they can spend that they can self-insure,” says Kulyk. “But the majority of my clients are more like garden-variety millionaires with $1 million or $2 million, and something can come along and drain their assets.”

Two other Kulyk clients, Peggy and Paul Courtright of Atlanta, bought a traditional long-term care insurance policy in 2006 that provides for an unlimited number of years of long-term care. Such generous coverage is rarely sold today.

Over the past six years, the Courtrights have seen their annual premiums almost double to $9,600. They weighed cutting back on their coverage to keep their premiums from rising so much. But at Kulyk’s recommendation, they swallowed the increases and kept the same coverage.

Peggy Courtright, 70, does volunteer work in nursing homes, and is glad she and her husband have choices if they need long-term care.

“The thought of ending your life in some Medicaid nursing home without any options is pretty terrifying,” she says. “I’ve seen friends and acquaintances go through long term and what we paid in premiums would have been swallowed up in the first few months.”

When it first became popular in the late 1980s, long-term care insurance was cheaper and usually more generous than the policies being sold today. It turned out that insurers had underpriced coverage. They overestimated the lapse rate, for the percentage of customers who would let their policies lapse before filing claims, and they underestimated how long people would require long-term care. Insurers were forced to jack up rates. Some exited the market.

Most of the insurance being sold today has more restricted guarantees, and insurance experts are hopeful that the companies won’t seek big premium increases in the future.

Consumers should understand what costs are covered when they buy long-term care insurance. For starters, most insurance isn’t effective until a customer has a cognitive impairment or is unable to perform two activities of daily living, commonly called ADLs. The activities include eating, bathing, getting dressed, using the toilet, remaining continent, and being able to get in or out of a bed or a chair.

As soon as they’re deemed benefit-eligible by the insurer, most policies provide for an elimination period where the customer is responsible for long-term care costs incurred. It is effectively the deductible. Most policies sold today have elimination periods of 30 to 90 days.

Policies vary in how much they pay out. But customers today might buy insurance that provides $4,000 to $6,000 per month in coverage with a guarantee that number will rise 3% annually to cover inflation. They might opt for three or four years of coverage.

The average woman stays in long-term care for 3.4 years; the average man for 2.5 years, according to a PwC study.

The problem is that averages don’t capture the wide range of outcomes; A quarter of the time, the expected cost of long-term care is less than $26,000, meaning a long-term policy may not even come into play. Five percent of the time, long-term costs top $578,000, exceeding the coverage limits of most policies and leaving the customer on the hook for substantial costs. One percent of the time, costs exceed $949,000, PwC found.

Couples can stretch their insurance dollars by buying pooled coverage. If a husband and wife each buy three years of coverage in a pooled policy, all six years can be used by either spouse.

“If you’re in long-term care for a month, three months, even six months, that will cost a lot, but it’s not ruinous,” says Steve Weisbart, chief economist for Insurance Information Institute, a trade group. “The ruinous thing is if you need seven years of long-term care. That will pretty much bankrupt everybody besides Bill Gates and Jeff Bezos.”

Nonetheless, Weisbart, 75, hasn’t bought insurance himself because he says it’s a risk he’s willing to bear. His wife disagrees, and wishes they had the coverage, he says.

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