Should you buy long term care insurance?
Posted on 08 November 2009
Permanent URL of this article: http://retirementrevised.com/money/should-you-buy-long-term-care-insurance
I’m asked this question often at my workshops and presentations, and it’s a critical one to think about as you near retirement. I’m sorry to say, though, there’s no simple answer.
Addressing the threat of potentially ruinous long-term care expenses could be one of the most difficult challenges in your retirement years. But that’s no excuse to put your head in the sand–which most people do–often with unfortunate results. While long-term care insurance may not be the answer for everybody, I strongly advocate that everybody does need to have a strategy to address the threat of long-term care expenses.
Many of us–including my wife and I and our brothers and sisters–are getting a rehearsal by helping our parents through the last years of their lives. We’ve gladly given them our compassion, time and money–a fitting way to give back for their substantial efforts in raising us. But just as important, we’ve been a witness to the high costs and diminishment of lives that result from needing care in their later years. Our experience has provided us with a powerful motivation to do everything we can to prevent or delay this from happening to us and the resulting
burden on our children. While there are no guarantees in life, there’s a lot we can all do to reduce the odds of needing long-term care–and to prepare in case we do need it.
What Is Long-Term Care?
You’ll need to consider getting long-term care when you can’t complete ordinary, daily living activities such as bathing, using the bathroom, preparing your own meals or following medical directives, including taking prescription drugs.
There’s a wide range of alternatives and costs for long-term care services:
Low cost: Your spouse, family or friends pitch in and take care of you (if they’re willing and able). The type of assistance you’d need and the time involved varies widely, from minutes to hours each day.
Low to medium cost: Home health care, where care providers come periodically to your home to help you as you need.
Medium cost: Adult day care or a live-in caregiver. Adult day care can work well for situations where 24/7 care isn’t needed or if household members have full-time jobs and aren’t able to be there when necessary. A live-in caregiver can work if you have a spare bedroom or two and don’t mind someone living with you; you can offer room and board and a modest salary. Note that this last approach requires special attention to taxes on the caregiver’s salary.
High cost: Nursing homes, assisted living facilities or residential care facilities for the elderly. Costs for these can range from $3,000 to $8,000 per month or more. At this rate, it won’t take long to wipe out your retirement savings. If you have the funds or long-term care insurance, however, this is one option to consider.
To make sure we’re all on the same page, let’s get the terms straight with these high-cost alternatives. Nursing homes are institutions with sick “patients” who need focused medical attention. Assisted living facilities have “residents” who need help with daily living activities. Some institutions combine features of both; you start in the assisted living wing, then if your health declines, you move to a wing that’s more like a nursing home.
Residential care facilities for the elderly (RCFEs) are licensed houses in regular neighborhoods that are home to a handful of senior citizens, typically up to six, with a staff that takes care of them. RCFEs generally have lower costs than institutional nursing homes and assisted living facilities, with the potential for a living situation that feels more like a home. Like anything else, there are good and bad instances of each type of facility, and you need to shop carefully.
One last point on expense: If you need care for an extended amount of time, the high-cost alternatives can end up costing more than the price of sending your grandchildren to Harvard! These expenses can easily wipe out any legacy you had hoped to leave to your spouse, children or charities. If leaving money to your family is important to you, you’ll need to be especially careful when determining just how to spend your retirement resources.
Why Would You Need Long-Term Care?
There are two primary reasons you may need long-term care in your future. The first is health related: If you’re in poor health and can’t take care of yourself, you’re going to have to find some help. The conditions that typically require long-term care and put people into high-cost facilities include Alzheimer’s disease, dementia, advanced osteoporosis or simple frailty of old age. These conditions manifest themselves over time; usually there’s a long period of onset accompanied by agonizing debate among family members regarding the need for long-term care. The good news is, these conditions can be delayed, mitigated or even prevented altogether with a healthy lifestyle–yet another reason to make your health a high priority. See my June and July newsletters for more on this topic.
The other contributing factor is the availability (or lack thereof) of family or friends who can help take care of you. In our grandparents’ day, families weren’t dispersed across the country, and family members often took care of their frail relatives. These days, having family nearby to help out puts you in the minority. Unfortunately, this may be the only solution for people who don’t adopt sound health and financial strategies.
What Can You Do About Long-Term Care Expenses?
The fact is, medical insurance policies and Medicare don’t pay for most long-term care expenses. And given our current habits regarding health and the geographic separation of family members, millions of older Americans are vulnerable to the threat of high long-term care expenses. As a consequence, everyone should have a strategy in place to address these costs; that strategy may or may not include long-term care insurance.
Some people think that Medicaid will bail them out if they need long-term care. Think again! Medicaid is a federal program that subsidizes costs for nursing homes and is administered by the states. This subsidy is provided for elderly people who are very sick and who have little or no financial resources. I consider nursing homes that accept Medicaid to be last resorts, for a number of reasons. First, you need to exhaust your financial resources, leaving you in a precarious financial situation. Second, you need to show significant medical need, and not everybody can meet the requirements. Third, not all facilities accept Medicaid, and the ones that do are often not the most desirable places to live out your last years. Finally, if you do decide to go with a Medicaid facility, you might not get your choice of location, potentially resulting in separation from friends and family.
OK, that’s the bad news. But there’s good news, too: Long-term care insurance can help provide protection and peace of mind.
If you’re considering purchasing long-term care insurance–and I recommend that you give it some serious thought–there are a few things you need to know. Not all policies cover all conditions or types of facilities, so you’ll need to pay attention to the fine print to make sure you’re getting what you want before you sign on the dotted line.
Also, premiums for individually purchased policies are expensive: Annual premiums can range from $1,000 to $3,000 or more if you start in your fifties, depending on the policy’s features. As a result, most Americans don’t buy this insurance. Or, unfortunately, some people do buy this insurance while they’re still working–when they can afford the premiums–but let them lapse when they retire and can no longer afford them.
I encourage everybody to shop for long-term care insurance as part of your process to develop a strategy for long-term care expenses. See how much the premiums would be, and factor them into your retirement budget. This will help you decide whether you should purchase this insurance or rely on alternative strategies. An internet search will yield good background information on long-term care insurance and alternatives. One good guide comes from the National Association of Insurance Commissioners.
Tips for Buying Long-Term Care Insurance
Should you decide to buy long-term care insurance, here are some tips to follow:
–Experience: Make sure the insurance company you choose has a lot of experience with long-term care policies. You should look for a company with at least 10 and preferably 20 years of history with this type of insurance. Check the insurance company’s rating by visiting a service such as Standard & Poors. I prefer companies with one of the four highest ratings.
–Rate hikes: Check to see how many rate increases the insurance company has imposed on existing policy-holders for the past five or 10 years. Several recent rate increases can be a warning flag.
–Fine print: Look carefully at the fine print to determine when benefits are payable or if there are limitations for pre-existing conditions. I’ve had family members who were initially denied benefits because they only met five out of six necessary conditions, even though it was clear they were unable to take care of themselves in the way you and I would think necessary.
–Coverage: Make sure the policy covers a range of care, from home health care to adult day care or nursing homes. Older policies often only covered nursing homes without paying for less expensive and more desirable alternatives.
–Premium variables: Be sure to read the policy carefully before making a commitment because premiums and related benefits can vary substantially based on the following policy features:
–Daily benefit: The amount of daily benefit payable, and whether the daily benefit amount is fixed in dollar terms or if inflation protection is provided.
–Elimination period: The length of the time before benefits are payable but after you’ve entered the facility or are incurring long-term care expenses (known as the waiting period, the elimination period or the deductible period).
–Benefit period: How long benefits are payable. Common periods can be for just two years, four years or for your remaining life.
And if you do purchase a policy, don’t think that you’re home free. The above policy features can substantially limit the benefits that are payable, and you still might need to spend significant, out-of-pocket amounts for long-term care.
Another option is to only buy partial protection with insurance. You can purchase a policy that partially insures against the risk of long-term care by varying the amount of the daily benefit, waiting period, benefit period and inflation protection, and then pay for the rest of your expenses out of pocket.
One final thought: Large employers will often offer group long-term care insurance to their employees. These policies can offer better terms and lower premiums compared to individually purchased policies. If your employer offers this option, check it out.
A Common Scenario for Married Couples
The following situation happens all too frequently with married couples. The husband is the first to need long-term care, since husbands are often older than their wives. In this case, the wife typically becomes the primary caregiver. Eventually the husband passes away, leaving his wife exhausted–both physically and financially. And there’s the distinct possibility that nobody is left to care for her, should she need long-term care.
For the reasons cited above, roughly nine out of 10 residents of nursing homes or residential care facilities are women. If you’re married and can’t afford long-term care premiums for both you and your spouse, a compromise strategy would be to buy insurance just for the wife. However, you need to understand and accept the potential burden this can place on the wife and have strategies in place in case the husband needs long-term care. Also, there’s the risk that the wife passes away first, leaving the husband vulnerable. Remember to consider all your options carefully before making your final decision.
Alternatives to Long-Term Care Insurance
If you decide not to buy long-term care insurance, then recognize that at some time in your life, you may need to pay for long-term care expenses with your own money. If you have substantial assets, this may not be a concern to you (I bet that Bill Gates doesn’t have this type of insurance). However, most people aren’t this fortunate, so you should consider one or both of the following strategies:
–Fund from savings: Set up a separate savings account that’s dedicated to long-term care expenses and won’t be tapped to pay for ordinary living expenses. Put into this account the amounts you would have paid for long-term care insurance premiums; over many years, it will add up and you’ll have a significant amount set aside when needed.
–Home equity: If you have substantial home equity, hold your home equity in reserve until you need it for long-term care expenses. At that time, you can tap your equity through a home equity loan, reverse mortgage or simply by selling the home and realizing the profit.
Avoid the temptation to take out a reverse mortgage or home equity loan to pay for ordinary living expenses or luxuries during your retirement years, however. And make sure you have a realistic estimate of your home equity, recognizing the potential decline in home values since 2008. Because long-term care expenses can vary widely, you’ll need a minimum of $100,000 and preferably $200,000 or more in home equity to rely on this strategy, and that’s just for one person. A married couple will most likely need more.
While everybody should get very serious about taking care of their health, this should be even more of a priority for people who don’t buy long-term care insurance. You have control of so many things that affect your health, so get started now on the road to better health in order to help eliminate or reduce the need for long-term care later. Healthy steps you take today can eventually save you tens or even hundreds of thousands of dollars down the road!
Some Final Thoughts
Let me repeat myself because this is so important: Everyone should have a strategy in place to address the potential threat of ruinous long-term care expenses. It’s easy to ignore this potential risk when you’re in your fifties, sixties or seventies, since the threat seems so far in the future. Resist this temptation! Not only can long-term care be very expensive, but it can be an emotional and exhausting burden on your spouse and children. I’ve seen normally friendly family members have bitter disagreements over how to take care of their parents.
As a result of our own insights and experience, my wife and I have become health nuts, and we’re proud of it! We don’t want to be a burden on our children; we want to lead full lives up to the very end, and we want to preserve our assets as a legacy to our children and charities.
I don’t want the unfortunate scenarios described here to happen to you and your loved ones, and the strategies offered here can help you and your family avoid this fate. So carefully plan your rest-of-life, while you still have the ability to make a difference in your future. This is a very important aspect of living smart and living well in your retirement years!
Steve Vernon is President of Rest-of-Life Communications, and a member of the Executive Faculty and Research Fellow with the California Institute for Finance at California Lutheran University, where he conducts research on behavioral finance. He recently retired as Vice President and Consulting Actuary with the human resources consulting firm Watson Wyatt Worldwide. For over 30 years, he helped large employers design and manage their retirement programs.
November 10th, 2009 at 10:05 am
My wife and I have had a high deductible health insurance plan for the past couple of years. Each year, on top of what the health insurer rolls over to our HSA, we contribute the maximum allowed to our HSA. We intend to do this as long as we can, including not signing up for Medicare until it becomes the best overall route. Our HSA, which is growing quickly and we don’t take anything out, and our contributions and interest tax free, will be our initial source of funds if we incur long term expenses. If we don’t incur long term care expensed, then our beneficiaries benefit, rather than an insurance company. So I guess this is like your option of saving, except we are doing it with tax breaks.
November 10th, 2009 at 11:34 am
Peter
HSA’s are brilliant things. I am a huge proponent and own one myself. Your strategy to fully fund it is brilliant. The fault is you have just underestimated how financially probable and catastrophic the cost of care is. For your sake, please get more info.
You can’t save HSA money, no matter how aggressive your rate of return, and have it grow to be more than a smattering of the actual costs of care, should you need care for any length of time (and the odds are high one of you will, unfortunately).
You may be dealing with some denial issues about just how probable the need for care is. Do research and get the facts please.
A smarter, wiser, more honest strategy would be to hedge your bet and use tax deductible HSA funds to pay reasonable long-term care insurance premiums.