Alternatives to Long Term Care Insurance

If last week we established that the need for long term care is a nearly 50/50 probability for the future of anyone age 65 now, and that insuring for it is very expensive, is there some way to defend against the financial cost besides buying insurance?

The Wall Street Journal article from which I quoted last week indicates that 48% of 65-year-olds will never need long term care; moreover, about 27% will need two years or less of such care.  A deeper look at that 27% reveals that the majority of that segment spends well under two years in a facility.  The American Association for Long-Term Care Insurance (see www.aaltci.org) concurs that about 50% of people will never be admitted to a nursing home.  But it calculated the odds slightly differently than the Wall Street Journal and determined that 20% of people stayed less than three months in a facility and another 10% stayed less than six months.  So that leaves only about 20% of the measured population whose nursing facility stay will exceed six months. 

Six months in a nursing home, at the national average, would cost about $41,500.  This is a much more manageable figure and one that is not out of reach for many people saving for retirement.  A big hit financially, to be sure, but survivable for most. 

So it comes down to a question of whether the one-chance-in-five of a lengthy (i.e. > 6 months) nursing home stay is worth insuring against with a long term care policy.  That might depend on your general state of health, family situation, and your family history when calculating your odds of needing care.

It could also depend on your marital status.  Married individuals, on average, spend much less time in a nursing home, presumably because they have a retired spouse at home to care for them, often eliminating the need for institutional care.

And reflecting the longer average life span of women, females tend to spend longer as patients when admitted to a nursing home because they survive their spouse (if they were married) and may not have someone to care for them as they age.

Financial planners tend to recommend buying insurance, including long term care insurance, to minimize risk for their clients, to protect financial assets.  I get that.  But they are also playing defensive financial planning: they don’t want to be sued by a client who ends up needing multiple years of skilled nursing care and draining all the money that he wanted to pass to his heirs, just because he wasn’t advised to purchase insurance.

I don’t think this insurance is a good deal for most people.  First, the premiums are very high and can keep rising.  If you stop paying the premiums before admission to an institution, you will lose coverage and have nothing to show for your premiums paid.  To make policies affordable in the first place, most of them are written with a 90-day elimination period, meaning it does not cover the first 90 days’ of care in an institution.  So right off the bat an additional 20% of people (on average) are going to get no benefit at all from the policy.

It’s also “buyer beware” when evaluating a policy.  There are many exclusions and exceptions to watch for, including non-coverage of some conditions or diseases, longer elimination periods, limits on amount paid per year, and length of stay limitations, to mention a few.  What I think are some alternatives to buying a policy:

1. Savings Together with Social Security or other regular sources of income, even $50,000 set aside for this purpose could be enough to cover a year in an institution.

2. Spouse and Family It’s old-fashioned, perhaps, and not always practical, but care by those who love you most can be the best care and keep you in the comfort of your home or theirs.  Savings could also be used to help them offset expenses.

3. Reverse Mortgage When you’re alone, out of money, need long term care, and have equity in a home, either selling it or converting to a reverse mortgage (assuming there’s someone able to care for the home and pay the taxes, insurance, and upkeep for you) may be a very good option, especially if you don’t anticipate returning.

4. Life Insurance If you’re counting on a spouse to care for you in old age but then the spouse dies early, a quarter-million dollar life insurance policy payout could buy you all the time you’ll ever need in a nursing facility.

I am not licensed to sell insurance and cannot advise you one way or the other on whether long term care insurance is a good buy in your unique circumstances.  But use your common sense and enlist some help in running the numbers as you review all your options and assets and plan for your future.

Until next time,

Roger

“But if a widow has children or grandchildren, they should learn to serve God by taking care of her, as she once took care of them.  This is what God wants them to do.” I Timothy 5:4 CEV