Should I Buy Long-Term Care Insurance?

Introduction

As an investment advisor, my business is focused on providing investment advice. However, I am sometimes asked my opinion about long-term care insurance. And as a 62-year-old, I have sometimes wondered about whether I should look into buying it for myself.

I am an avid researcher. In preparing this article, I read quite a few papers and articles. I found that most of the information available online comes from sources that have an interest in selling long-term care insurance (LTCI). However, when I turned to more scholarly academic sources (mostly found through Google Scholar), I found quite a different take on the subject.

The Likelihood, Duration, and Cost of Long-Term Care

You might assume that “everyone will need long-term care at some point.” This is an assertion sometimes made by insurance agents seeking to sell coverage.  However, a well-respected study (Hurd, Michaud, and Rohwedder 2014) found that only 44 percent of men and 58 percent of women will ever use long-term care.  Of those that do use long-term care, men and women will experience an average stay of 0.85 and 1.37 years, respectively. By far the most common length of stay at skilled nursing facilities falls within the 100 days that are covered by Medicare. These short-term stints are not covered by LTCI since nearly all policies have an “elimination period” that delays the start of benefits for some time after the onset of the need for care, typically 90 days (roughly the amount of time that is often covered by Medicare).

On the other hand, a recent study (Ameriks, et. al, 2018) found that for Americans over age 65 there is about a 1 in 6 chance that they will need at least three years of long-term care, which they estimate would cost more than the wealth of 75 percent of older American households. It is this downside risk of needing an extremely long period of care that motivates most purchasers of long-term care insurance.   

Long-term care costs depend on type of facility, geographic location, and of course, quality.   Nursing homes are the most expensive facilities, but may be the only type of facility that can supply the intensity of medical care needed for many.  

Genworth provides the following U.S. monthly median cost estimates as of 2020:

In the greater Philadelphia area where I live, the median monthly cost of a private room in a nursing home is $12,498. That equates to $150K per year. Perhaps it should not be too surprising that on average retirees run through about half of their remaining wealth in the last four years of life (French, De Nardi, Jones, Baker, and Doctor, 2006).

How Long-Term Care Insurance Works

Insurance is meant to provide protection against very expensive but unlikely events. For example, life insurance protects you against an untimely death when you have people who are depending upon your income.  Fire insurance protects you from the unlikely event that your house burns down.

Ideally, long-term care insurance would also similarly provide protection against a catastrophically long need for care. When LTCI insurance was first introduced, that kind of coverage was typical. When LTCI first became common in the 1980s, many policies had lifetime benefits. Many also had inflation escalation clauses that meant benefits were indexed to inflation.  

No longer. Insurance companies found that their underwriting assumptions were much too generous to the policyholder. They lost a lot of money on the policies they had written and they extensively revised the coverage terms. All of them substantially increased the premiums that policyholders had to pay. Many exited the market altogether. 

Today, LTCI is not so much insurance as it is prepaid care. Lifetime benefits are extinct. Now, benefits are only for a limited time, known as the “benefit period.”  Policies can cover care for as little as one year or up to as much as five years, depending on the choice of the buyer and how much they are willing to pay in premiums.

Benefits do not begin until after the “elimination period” that delays the payment of the “daily benefit amount” (e.g., $100 per day). This waiting period is a kind of deductible that is typically 90 days after the “benefit trigger.” Most policies define the benefit trigger as the onset of serious cognitive impairment or a need for help with two or more of the six “Activities of Daily Living (ADLs):”

• Bathing
• Dressing
• Transferring (moving to and from a bed or a chair)
• Eating
• Toileting
• Caring for incontinence

The benefit trigger must be based upon an evaluation from a nurse or social worker and accepted by the insurance company.  Sometimes policyholders have difficulty obtaining this approval. 

Daily benefit amounts are not typically indexed to inflation these days, but for higher premiums, they can increase at a certain annual rate, typically 1%-5%.

Most LTCI is bought by people between the ages of 55 and 65. Most long-term care takes place after age 85, or 20-30 years after purchase. Meanwhile, insurance companies may raise the premiums if they are granted permission by state insurance commissioners. In the past, the increases in rates have been breathtaking in many cases. If policyholders refuse to pay the increased premiums, their benefits may be cut. Or they may let their policies lapse, often without ever having received any benefits.

Reasons for Low Uptake of Long-Term Care Insurance

As of 2014, only about 13% of U.S. residents had LTCI. Why is the "uptake" so low? Most researchers assert that a much higher percentage of people should find it advantageous to purchase LTCI (if it was offered at an actuarially fair price—a subject we will get to in a bit). The low uptake rate for LTCI is referred to in the literature as something of a “puzzle.” The following factors are usually cited to explain the unpopularity of LTCI:

High cost. LTCI is expensive. For example, according to the American Association for Long-Term Care Insurance, in 2021 the average annual premium for a 65-year-old couple with no inflation escalation in benefits was $3,750.

It is primarily the wealthy that have enough income to pay that kind of premium for 20-30 years before receiving any benefits. Not surprisingly, having LTCI is highly correlated with wealth. A recent Urban Institute study (Johnson, 2016) found that in 2014, 25 percent of individuals 65 or older who had at least $1 million in household wealth had some form of LTCI. The rate fell to 20 percent for those with wealth of $500,000 to $1 million. But it then dropped to only 8 percent for those with wealth of between $100,000 and $500,000, a cohort that constitutes about 40 percent of the over-65 population.

Medicaid “crowd out.” Often those who are not in the top 1/3 of the wealth spectrum will, if necessary, rely on Medicaid to pay for their long-term care as a fall back option. Eligibility requirements vary by state, but essentially, to qualify older persons must impoverish themselves by spending substantially all of their assets and income on the costs of their care. Although married couples are allowed to retain some assets and income for the non-institutionalized spouse (the primary residence and a car are often exempted, for example), Medicaid recipients are allowed very little personal income or assets.

The evidence regarding the quality of care provided under Medicaid is mixed. Consumer Reports found that in order to promote their products, long-term care insurance agents frequently disparaged Medicaid, implying it provides substandard care, although the magazine found that the quality of a nursing home has little to do with who pays the bill. Nursing home quality is usually measured by such factors as number of deficiencies (e.g., bedsores), registered nurse FTEs per 100 residents, and percentage of residents with a psychiatric diagnosis. On the other hand, there is evidence that “so-called bottom-tier nursing homes are almost entirely paid for by Medicaid” (Mor, Zinn, Angelelli, Teno, and Miller 2004).

Essentially, Medicaid directly competes with LTCI, since it is a long-term care payer of last resort. Every dollar in benefits provided by LTCI is a dollar that would otherwise be paid by Medicaid for those that will ultimately qualify under the program. This greatly discourages the purchase of LTCI.

Informal Care. Historically, most of the care provided to the elderly and infirm was provided by family members, particularly female family members. While family dynamics and societal assumptions are changing, there are probably many who still assume that family members will provide care when needed.

Limited consumer understanding and awareness. Most people probably have not even considered LTCI. Unless it is offered by their employer, they may never even have heard of it. People often assume that Medicare will cover more than it actually does. In fact, Medicare only covers temporary and acute care, including up to 100 days in a rehabilitation facility or nursing home after a hospital stay of at least three days.

Limited consumer rationality. LTC is unpleasant to think about, and people tend to ignore what they find unpleasant. Also, needing LTC for an extended period is a small probability event, which people have a hard time assessing accurately. Perversely, people are more likely to purchase insurance for low-cost and high-frequency risks (inconvenience) than for high-cost and infrequent risks (catastrophe). True insurance protects against the latter, but the popularity of extended warranties, dental and vision insurance, low-deductible medical coverage, and even credit life insurance for auto loans all demonstrate that the common mindset is more attuned to the former.

Restrictive coverage. Some policies will pay a family member to provide care, but certainly not all do. Some will not pay for at-home care of any kind. Some put other restrictions on the type of facility that provides the long-term care. Most people would rather save their money so they can decide how to spend it most efficiently rather than give it to an insurance company that may restrict their flexibility.

Poor return on investment. All of the academic papers and scholarly articles I read (as opposed to general information from industry-related sources) agreed that LTCI is characterized by a bad combination of low payout rates to policyholders, high administrative expenses, and heavy sales loads. From an actuarial standpoint, LTCI is one of the most expense types of insurance offered.

Why Long-Term Care Insurance Is Unattractive for Both Buyers and Sellers

Even with aggressive increases in premiums, reductions in benefits, and tightened underwriting standards, insurance companies have had a very difficult time making a profit from LTCI. Most have abandoned the market. Between 2002 and 2014, the number of policies sold in the individual market each year fell 83 percent, from 754,000 to 129,000 (Cohen 2016). Over 66% of all new policies issued in 2013 were written by only three companies. The reduced competition has made the purchase of LTCI even less attractive for consumers.

There are several factors that contribute to making LTCI unprofitable for insurance companies and unattractively priced for most consumers:

Adverse selection. Those most willing to buy LTCI tend to have reason to believe that they are more likely to need it than most people. They may have private information about a lurking medical condition, for instance. Insurance companies price policies accordingly, making them relatively unattractive to the average potential buyer.

Moral hazard. The very presence of LTCI insurance provides an incentive to use it and not let it “go to waste.” This applies to both the person covered and their volunteer caregivers (often family members).

Administrative costs. Compared to most other forms of insurance, the paperwork required to receive LTC benefits is complex and ongoing. Many parties may be involved, including the policyowner, the insurance company, the long-term care facility, and often several medical providers. Research found that 16% of the present-value premium for LTCI was consumed by administrative costs in 2014.

Commissions. “Insurance is sold, not bought” as the saying goes, and this seems to apply even more to LTCI than most other kinds of insurance. Selling LTCI can be highly remunerative for insurance agents. One study revealed that in 2014, the average sales commission was 105% of the first year premium.

None of these factors is likely to change and all contribute to the reality that LTCI is extremely expensive and is likely to be actuarily overpriced for most of those who purchase it. Well-known LTCI researchers Brown and Finkelstein (2008 and 2011) found that the present value of benefits received for LTCI was only 50 to 68 percent of the premiums paid. They found that “LTCI policies are sometimes twice as expensive as actuarially-fair insurance” and that the relationship of premiums paid to benefits received is very high relative to other insurance markets.

Strategies for Financing Long-Term Care

Given these facts, what are the best strategies for financing your long-term care?

Save. Plan for the downside. Hold in reserve a portion of your retirement savings to cover end-of-life needs. Ideally, that would mean at least three years of nursing home care, and even more if possible. You want to have enough resources left towards the end of your life to pay for high quality care.

Move to Texas. (Just kidding, sort of.) How much is three years’ worth of nursing home care? Well, that all depends on where you live. According to AARP’s website, that would be $450,600 if you live in Connecticut, or $164,400 if you live in Texas. Just saying.

Plan Ahead. If you want to stay in your home as long as possible, make sure it is either wheelchair compatible or can be made so. Or buy some place that already is. Line up in-home caregivers. Know your options with respect to local rehabilitation centers, assisted living facilities, and nursing homes.

Buy into a Life Care Community. These are a special category of “continuing care retirement community (CCRC)” that offers a “Type A” contract. This involves a substantial entrance fee but assures stable monthly fees regardless of needs. CCRCs typically have different sections for different levels of care, from independent living to assisted living, and some even have special memory care wings. This allows couples to stay together or only steps apart regardless of their differing care needs. They tend to not be nearly as regimented and sterile as nursing homes, and may feel more like hotels than hospitals. Indeed, one doctor friend of mine who moved into a high-end CCRC told me that it was "like being on a permanent cruise." Even among the better facilities, it is common practice to accept private payment initially but continue care even after a patient’s resources have been exhausted. The key is having enough savings so a top-tier facility will let you in.

Be nice to your family. You are likely to need them.

You may have noticed that “buy long-term care insurance” is not on my list.