For us, the debate over long-term care insurance (LTCI) is finished. We aren’t buying it.
In my last article on LTCI, I explored the pros and many cons of this complex product pitched at baby boomers. LTCI does leverage your money in some health-care scenarios. It has some tax benefits. And it can ensure that you save something towards your care.
But the drawbacks are significant: premiums are not guaranteed, most policies are too short to protect against the worst scenarios, and filing claims is an arduous process for the family. LTCI offers a fixed dollar benefit — not blanket protection. Despite the impression you may get from an insurance agent, buying LTCI doesn’t eliminate all your long-term care concerns.
Still, when I received our personal quotes, I was surprised. Buying LTCI wasn’t as expensive as I thought it could be. The decision was harder than I expected. Given the confusing data and emotional appeals, it wasn’t until I actually ran the calculations, that I could form an educated opinion on whether LTCI was for us or not.
Yes, most people will need some long-term care. Yes, it can be a serious expense. But whether or not buying insurance is actually a good solution to that problem, comes down to the numbers.…
When you go shopping for LTCI, you’ll run headlong into a statistical thicket. The insurance industry is very happy to deluge you with data. But it turns out you can ignore much of it when valuing policies. Let’s see what and why:
Probability of you needing long-term care — most of us will need it. But that fact is immaterial. A few days, weeks, or even months of long-term care isn’t dangerous to a well-prepared retirement. It’s when the term stretches into years that we need to be concerned. So it’s the average or probable length of long-term care that matters in your analysis. Not the probability.
Percent of people who do/don’t have LTCI — this is simply an appeal to your herd instinct. If LTCI is a bad value, does it matter if plenty of people have purchased it? If it’s a good value, would it matter if relatively few people have it? I advise doing the math and thinking through your own situation. Ignore what others are doing.
Elimination period — this is how long you must pay for care, before insurance kicks in. Other than for comparing specific policies, it’s immaterial. When analyzing LTCI, I’m interested in worst-case scenarios. Since elimination periods are typically measured in months, they don’t matter much compared to the worst long-term care scenarios — measured in years or decades. A typical 90-day elimination period will barely dent a well-funded retirement.
Cost of long-term care — insurance agents love to quote the cost of a private nursing home room in your location. The numbers are sure to shock. Price tags in excess of $80K/year are common. Yes, you need to know that long-term care is expensive, if you didn’t already. But that’s immaterial when evaluating the value of a LTCI policy. For starters, you must think about how long you are going to need that expensive care. Then you need to understand how these policies work: they pay a maximum dollar benefit, in exchange for your premium. Whether or not that is a good value, is unrelated to the magnitude of the risk you are insuring against. If I describe the terrible consequences of a major asteroid strike on earth, will you run out and build a survival bunker in your backyard? Probably not, because it’s a poor return on your money, given the risk.
It turns out that the data needed to compute the value of LTCI is relatively minimal. Here is what really matters:
Premium — the cost to you each month to keep the policy in force. Just remember, one of the most serious issues with LTCI is that this number could change. In your calculations, and mine below, you need to picture a set of question marks after every number based on today’s premium. It could well change, and the direction would almost surely be up!
Total benefit — sometimes called the policy limit or “pool of money,” this is the maximum the policy would ever pay out, in the worst-case scenario. Remember, LTCI policies don’t offer blanket coverage for long-term care expenses. They reimburse only up to some total amount, and then stop paying. We’re mostly interested in that tapped out scenario, because it would be the best case for demonstrating the value of insurance. So, I use this number in the analysis.
Inflation protection — given the time frames for LTCI, measured in decades, I would not consider a policy without inflation protection. Generally, this is a compounded fixed percent, often 3%, or is indexed to some government measure. The fixed percent has the advantage of being predictable, so we’ll use it for our calculations.
Investment return — this is the opportunity cost to you of paying a regular insurance premium, rather than investing that same money in stocks and bonds. Insurance agents would like to overlook this, but you can bet the actuaries at the insurance company are figuring what they’ll get when they collect your money, turn around, and invest it. Like inflation, lost investment return cannot be ignored over long time spans. But, given current economic conditions, we’ll use a relatively conservative value of 6%.
Your time in long-term care — this is the unknown data point that drives all others. If you need only a few weeks of intensive care at the end of your life, then buying insurance will be a waste. If you’re incapacitated in your 70’s and need 15 years of long-term care, insurance could be helpful, though unlikely to cover all your expenses.
Choosing this number is a personal decision driven by your own family health history, and your perception of risk. Presumably it would be helpful to know the average time in long-term care for the general population. One of the most recent and authoritative studies of LTCI comes from the Center for Retirement Research at Boston College. It collects and reanalyzes data from at least six previous studies. My simple average computed across the studies (dropping one outlier number), shows an average mean duration of care for men and women of less than 9 months!
Given the many shortcomings of LTCI, bad press about the policies, and our less-than-perfect health history here in our mid-50’s, I expected to receive LTCI quotes that were clearly exorbitant. But they weren’t. Frankly, LTCI was a better value than I expected, though my expectations were pretty low.
Even though the numbers ultimately didn’t compel us, I wouldn’t necessarily fault others for buying modest LTCI policies. Maybe carrying insurance gives you peace of mind, and it can pay off in certain scenarios. Though I doubt it could thwart bankruptcy for most of us.
For me the decision comes down to this question: What am I getting for what I’m paying? And the financial analysis consists of reducing a series of future payments to single present or future values, for easy comparision.
Most of the quotes I received were comparable, though one stood out as the best value. This was for a premium of $324 monthly for the two of us, guaranteeing a maximum benefit of $324K in present day dollars, adjusted for inflation at 3% compounded annually. That maximum benefit would be paid if each of us needed long-term care for a 3-year benefit period — the worst case.
To analyze this quote, I assumed we would consume the entire benefit, after having paid premiums for various periods into the future, from 5 to 40 years. To simplify the analysis, I ignored tax implications, inflation during the benefit period, and monthly compounding. I also assumed there would be no premium increases over 40 years — a huge assumption. Here are the results:
I find it easier to think about this decision in terms of present values. But I’ve computed future values above too, so you get a sense of magnitudes down the road. Insurance agents like to impress those large future numbers on you.
The first thing to notice in the present value columns is that this is a grim race with the insurance company: Require long-term care when you are relatively young, and you win, financially. Require it much later, or not at all, and the insurance company wins. LTCI can be a screaming good deal, if you’re afflicted early. But, at the time we are most likely to need it, in our 80’s or 90’s, 30-40 years from now, the picture is less clear.
Focus on the second to last line in the table, 35 years from now, when we’re about 90. Based on recent family history, that’s a reasonable guess for when one or both of us might need long-term care. Assuming we used the entire benefit, 3 years of long-term care each, and the premium didn’t increase, we’d get back about twice what we paid in. Sounds pretty good. But what are the chances?
Another way to look at these numbers is that the insurer is betting we’ll need less than about 53% of the benefit in our early 90’s. That comes out to 1.6 years each in long-term care. Insurance companies, at least those planning to stay in business, only take bets they’re going to win, on average. Turns out this is a very good bet for the insurance company. We’ve already seen that the average need for long-term care is less than one year.
Finally, let’s look at absolute dollar values. The present value of the benefit in our 90’s is about $50K more than the value of the premiums paid in, assuming they don’t go up. That $50K is our biggest potential win, in the worst case, after maintaining an LTCI policy for 35 years. This is where thinking in present day dollars is helpful. Does a $50K outlay sound like the difference between comfort and bankruptcy in an otherwise well-funded retirement? Not to me. Does it sound like an amount you could self-insure, given the time span involved and the uncertainty of the risk? To me, it does.
Do-It-Yourself Long-Term Care
So we will self-insure for long-term care. The idea is abhorrent to some. One insurance agent paints images of middle-aged children having to “change their parents’ diapers.” Another warns that long-term care can “tear families apart.”
But I have some experience with caring for critically ill family at home, enough to get the picture. Ageing and dying are never easy. For most of recorded history, families cared for each other. And families are still often the first line of defense. Yet most LTCI policies will not compensate family members unless they are licensed health care workers.
The modern world offers more than one tool for long-term care. In most areas, you can call a nearby firm and have a competent home health aide at your house a day or two later. They can assist with any activities of daily living, and perform light house chores. Costs can average around $20/hour, or $80 for a half-day of care. That’s about $30K/year, less than half the cost of a typical nursing home.
Health care technology is continually improving. We’ll see more and more opportunities to receive long-term care within our own homes. Doug Nordman at The Military Guide, has dealt with an Alzheimer’s-afflicted parent for more than seven years. He writes, “I’ve learned that health tech is a better use of my money than LTC insurance. I think that safety sensors, health monitors, assistive equipment, and perhaps even robots will reduce caregiver stress. Insurance companies are not reducing caregiver stress.”
Other factors could reduce the burden of long-term care in specific cases: For a sole surviving spouse, long-term care expenses might not be incurred in addition to other living expenses. Rather, long-term care might replace housing, utility, transportation, food, and recreation. It might not be a major increase in existing living expenses. Secondly, regional differences in pricing are significant. So, if you are flexible, relocating could significantly lower the costs of long-term care. Lastly, we each have some control over our eventual need for long-term care: A healthy lifestyle — natural diet, regular exercise, mental challenges — can reduce the risk or duration of incapacity at the end of life.
People buy insurance for the peace of mind, but what they actually get in financial terms is another matter. LTCI won’t fully protect your wealth: It just defrays the costs in the worst scenarios.
Right now, in our 50’s, would be the optimal time to buy LTCI, in theory. Yet I’ve run the numbers and they are not compelling to us. Odds are we wouldn’t even get our premiums back. And, we can self-insure easily enough for the maximum benefit that a modest LTCI policy would cover.
In the worst case, we will have to pay out of pocket for a private room in a nursing home. We’ve saved and lived frugally our entire life, to be as prepared as possible for such a scenario.
Safeguarding our wealth, living frugally, and maintaining a healthy lifestyle, will continue to be our solution for long-term care. We’re informed and prepared, but we aren’t buying the insurance.