Is Long-Term Care Insurance a Waste of Your Money? – Middle-aged and older people, especially those in their 50s and 60s, often contemplate buying long-term health care insurance. In the end, only about 2.3% of this age group actually purchases it. The industry has contracted drastically since 2000, from over 100 insurance companies to only around 12 at present. The uncertainty of future claims and low rates of return on premiums have driven the decline.
The remaining plans vary significantly in terms of costs and benefits. The essential rationale is consistent: Consumers are juggling today’s known cost of premiums with the eventual cost of the care itself, which is difficult to estimate.
What benefits does insurance provide?
Policies cover the cost of care for chronic disabilities and medical disorders provided in the policyholder’s own home, a nursing home, an assisted living facility, a hospice or an adult day care center. In 2020, the U.S. Department of Health and Human Services found that, on average, men are likely to need 2.2 years of such care, while women may need to rely on these services for 3.7 years. Yet care needs may fluctuate, such as for those who can alternate between a facility and a home health aide during periods when their conditions change.
The uninsured largely pay out of pocket, although Medicaid will usually help after they have depleted their savings down to the final $2,000. Remember that you must keep paying premiums to keep policies in effect.
The nature of the care is custodial, meaning it is intended to cover daily activities, like feeding, bathing and dressing, rather than acute interventions like surgery or hospitalization. For those latter costs, Medicare is the most likely resource, generally providing up to 100 days of skilled nursing care for each illness or injury.
What about costs?
Long-term care insurers calculate their costs based on morbidity (the probabilities of illness), in contrast to life insurers, who look at mortality, which is the likelihood of dying at an estimated age. Individualized premiums depend on multiple factors:
- Marital status.
On the positive side, some tax deductions may be available; on the negative side, prices may later rise if state regulators approve an increase.
Most policies require an elimination period, ranging from 30 to 90 days, before they start paying out. They also set a limit on maximum lifetime payouts — so don’t count on too many decades in that expensive nursing home! The bills mount quickly. For instance, Genworth’s 2020 cost of care survey lists an average $105,852 per year for a private room in a nursing home compared to $51,600 for a one-bedroom apartment in an assisted living facility.
Who really needs insurance? Who doesn’t?
Aggressive marketing persuades some consumers to sign up for policies that make little sense for their own circumstances. If you have sufficient resources and savings to self-insure, preferably with some funds left over, you probably are not a suitable candidate for this option. Moreover, if you do enter a nursing home, you probably will no longer need or be able to make much use of a car, a house or even savings. In that case, you would be able to sell some of these assets to cover additional care expenses.
Meanwhile, a significant element of care is typically provided by family and friends. For example, a spouse frequently becomes chief caregiver. What happens if savings become exhausted? Then some 20% of seniors turn to Medicaid for their long-term care. For married couples, Medicaid also allows one spouse to retain some assets.
Why would anyone choose an insurance plan? Common reasons for choosing this option are that these candidates wish to preserve their estate for their heirs or they simply lack the funds to self-insure.
A checklist of tailored questions
Consider whether these apply:
- Do you have preexisting conditions that might cause insurers to reject your application?
- Are you over 75? Again, you may be rejected or find policies prohibitively expensive.
- Are you likely to need help with daily activities? Which ones and how many? The insurer may send a nurse to check in on the insured.
- What is your family health history, including for dementia and Alzheimer’s?
Talk to your financial advisers about whether a long-term care policy would truly serve your needs, and if so, which one.
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