Taking a Second Look at Long-Term Care Insurance

by Kevin Mercadante

In recent years, long-term care insurance has become increasingly popular. This has largely come about because people are living longer and as they do, they face a greater likelihood of needing non-medical care in their last years. It may also be happening as a result of the fact that since few people have defined-benefit pensions, most have self-directed retirement portfolios that they want to protect.

Do you need long term care insurance?

Do you need long term care insurance?

But the glitter on long-term care insurance may be dulling. Moody’s Investors Service did a report last fall that revealed that many of the major insurance companies have abandoned the market. And the few that are left face an uncertain future.

As a result, you may want to rethink your quest to add long-term care insurance to your mix of coverages.

Future Costs are Hard to Accurately Predict

One of the most basic problems of long-term care insurance is that it just hasn’t been around that long. It got started during the 1980s, which doesn’t provide a lot of time to measure actuarial experience. There’s also a host of variables that apply to each claim, including how many years a person will need benefits, and what level of care they will need.

The Increase in Average Lifespan Also Increases Uncertainty

One of the biggest variables that the industry is struggling to come to grips with is the fact that people are steadily living longer. An increase in lifespan may be a positive outcome from a personal standpoint, but for companies providing long-term care insurance it’s a ticking time bomb.

What it means is that the potential liability an insurance company faces is never entirely known. An increase in the average lifespan by just two years over the next two decades could cause an explosion in the number of claims for long-term care insurance. It is ironic that the longer people live, the greater the likelihood long-term care will be needed.

The Coverage is Expensive and You May Never Need it – or Get it

Complicating the situation for us as individuals is that long-term care insurance is very expensive. For example, if you’re in your 40s, the annual premium averages about $700 per year. If you add an inflation provision – and you virtually would have to considering you’re talking at least 30 years in the future – the annual premium just about doubles.

It can cost several thousand dollars per year by the time you reach your 60s and 70s, which is a cost most people cannot afford to cover if they are living on retirement income alone. In addition, long term care insurance only pays a flat amount of benefits, generally $150 per day. In many parts of the country the cost of long-term care facilities is substantially higher.

And to add an additional complication, long-term care is a type of insurance that you may never need to collect on. You can pay it for most of your adult life and never make a claim. If you do need to make a claim, there’s no guarantee that the insurance company will be around to pay it.

Alternatives to Long-Term Care Insurance

Long-term care insurance may not be the right remedy for preparing for a time in your life when you may not be able to care for your basic needs. We should still make an effort to provide for that possibility in other ways.

Take better care of your health. There’s no question that there are certain illnesses, diseases or injuries that leave us unable to take care of ourselves and are completely beyond our ability to prevent. But there are many other medical conditions that are fully preventable. That makes a strong case for taking better care of our health. That means more exercise, a healthier diet, and a more comprehensive approach to meeting our emotional and spiritual needs. Illnesses and accidents can come from any direction, but we can do much to reduce the likelihood of their occurrence simply by becoming more proactive about our health.

Accelerate your retirement investments. From a financial standpoint, the best preparation includes extending retirement planning to the potential for long-term care needs. This will mean increasing the amount of money you save for retirement, and even investing more aggressively. For example, if an insurance company would provide you with a $150 per day long-term care benefit, you’re looking at about $55,000 per year. Over a five-year period, that’s $275,000. How much extra saving and investing would you need to do to create or increase a portfolio to cover that? Over a period of 20, 30, or 40 years that’s very doable, and it would give you more control than you would have from purchasing long-term care insurance.

Develop care alternatives. Way back when, if an elderly person became incapacitated they would often be cared for by family members. While the idea has largely gone away, an increase in the number of senior citizens – many of them requiring daily assistance – may see that come back in the future. Perhaps you can work out an agreement with close family members to handle your care at a level of pay that is substantially less than what you’d pay for a long-term care facility. For a non-working spouse or an empty-nester looking for more income, this can prove to be win for both you and the potential care giver.

Providing for a time in your life when you can no longer care for yourself is at best an inexact science. It probably cannot be handled as neatly and efficiently as simply paying an annual insurance premium. You might want to start making alternate preparations now – long-term care insurance may not be there in the future.

Do you have a long-term care insurance policy, or are you considering getting one?

Photo Credit: Alex E. Proimos

Published or updated April 1, 2013.
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