Is Long-Term Care Insurance Really Worthwhile?

An image of a man holding out his hands with many different images Credit: Shutterstock photo

Special Report:Retirement Planning 2015

T ricia Baker rues the day, some 25 years ago, when her parents were talked out of buying long-term care insurance. Today, these elderly parents, who have dementia, live in an assisted living facility that costs $8,000 a month.

But after their money runs out, they'll have to go on Medicaid, says Baker, of Greenville, N.C. "They'll probably have to move somewhere not as nice, since their facility doesn't accept Medicaid."

To help avoid such sorry sagas, Baker believes "everybody should have long-term care insurance (LTCI) if they can afford it."

Or should they?

That quandary comes as ever more baby boomers reach their 60s and have to consider that they may need long-term care. But data show few people rushing to buy LTCI as part of their retirement planning . And now, in controversial reports, Boston College's Center for Retirement Research ( CRR ) is lowering its boom.

In a November brief, the CRR deemed LTCI "optimal" for only about 20%-to-30% of unmarried individuals. While the "risk of needing a nursing home is higher than some researchers previously thought, average nursing home stays are shorter, and thus, less costly," explains CRR senior research economist Anthony Webb. What's more, Medicaid often kicks in if long-term care patients run out of funds.

And the CRR's view -- that LTCI is often not cost-effective -- doesn't just apply to singles: In a report due out in March, the CRR will explain why this insurance also "may not make sense for most married couples," Webb says.

But even as LTCI proponents sharply disagree with the CRR, data does show flagging interest in traditional LTCI. According to LIMRA, a worldwide research firm, sales of individual LTCI policies slid an average annual 6.9% between 2004 and 2013. Experts cite such deterrents as policy rate hikes, a weak economy, insurers exiting the business and a general reluctance to buy the product.

Deemed Expensive

Among consumers' concerns: LTCI is widely deemed expensive. The average premium cost for what's dubbed "best coverage" for a couple aged 60 is about $3,840 a year, according to the American Association of Long-Term Care Insurance. Premiums can rise. And policyholders could be paying premiums for years -- even after they retire and live on a more fixed income -- without knowing if they'll ever use the coverage.

Indeed, "Few of my clients have ever had any significant amount of long-term care," says financial adviser Paul Ruedi, of Champaign, Ill. "If they have needed this care, most of my clients, who are affluent or semi-affluent, self-funded it."

He feels LTCI might be advisable for those with $250,000 to $750,000 of assets, who want to leave inheritances but have a family history of longevity with long-term care needs.

But government data show 70% of those turning 65 will need long-term care at some point. Having LTCI, its proponents say, can provide important benefits to both patients and their families. For instance, policyholders could expect that they wouldn't be bankrupted by care costs. They could better afford professional home care, instead of burdening their families with their care, and they could preserve assets for heirs .

And if they don't drain their funds -- and have to use Medicaid -- on care costs, they'll likely have more choices about how and where to get care. Some nursing homes don't accept Medicaid.

Care At Home

And as for the CRR's views on LTCI: proponents of the insurance widely and sharply disagree. To Tobe Gerard, who specializes in selling LTCI, the CRR's findings are "dated," especially given the studies' focus on nursing home care. "Today, LTCI is really about care at home. That's where most people want to receive care," points out Gerard, of Natick, Mass.

Says the CRR's Webb: While the Center's data do focus on the use of care in nursing homes, "our estimates of the value of LTCI also take into account home health care and stays in assisted living facilities."

To financial adviser Steve Samuel, everybody should plan for what they would do if they needed long-term care. And LTCI should be one consideration. "People with assets of at least $250,000 likely have enough money to afford an LTCI policy worth buying. And it could help them stay in their home longer if they need care," says Samuel, of Dedham, Mass.

Other options include transferring assets to, say, family members so that Medicaid requirements can be met. Self-insuring using a reserve fund is another way to go.

Or, if consumers do want insurance, there's a newer variation: hybrid-LTCI plans, which are surging in popularity, according to LIMRA data.

These hybrid offerings are life insurance or annuity-based products with an LTCI rider. The most popular kind are the single-payment (say, a one-time $100,000 outlay) life insurance policies that provide LTCI if it's needed. If it's not, the premium isn't just wasted: the policy can provide a death benefit, or the premium can be returned to the policyholder. Likely candidates: Those who can afford a large one-time payment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.