How is purchasing long-term care insurance (LTCI) like planting a tree? For both of these activities, the best time to accomplish it is 20 years ago. 

Now in what way is purchasing long-term care insurance not like planting a tree? The next best time for tree planting is now, but that’s not necessarily the case for buying long-term care insurance.

IS LTCI A SCAM?

Why is long-term care insurance so inscrutable? This insurance is fairly new, closely following the history of nursing homes, which emerged relatively recently, according to a National Academy of Medicine (NAM) article. The 1935 Social Security Act (SSA) allocated funds to states to care for destitute older adults. Social Security, combined with the Medicare and Medicaid amendments of 1965, “created a cultural and economic preference for institutional long-term care,” the NAM article stated.

As a higher percentage of adults entered the workforce, more working-age adults required help caring for aging parents. LTCI became increasingly available across the country in the late 1960s and 1970s. It became quite popular in the 1980s and early 1990s.

For insurance companies, pricing this new type of policy required some clever and even prescient forecasting. Like most insurance, LTCI was designed to provide a cushion of funds in the event that a specific event occurred. The early plans often covered costs, after a small deductible, for nursing home care for the remainder of the covered person’s life.

The early insurers underestimated several key inputs in computing their policy prices. One was the large fraction of policyholders who would continue to pay on their policies for years rather than let them lapse. A second was how much long-term care costs would increase in the ensuing years. Finally, they underestimated how much longevity was increasing in the U.S. These early policies were thus relatively generous in terms of what they would cover and how many years they would pay (often for life). 

By the early 2000s, it became evident that companies didn’t have sufficient reserves for the liability of their policyholders. This led to problems with coverage denials for elders who had paid in for years or decades.

PROS AND CONS

Over 8 million Americans hold long-term care insurance today. Meanwhile, over half of Americans who are currently 65 or older will need some type of long-term care in their future, according to the U.S. Department of Health and Human Services. Men needing long-term care will require it for 1.5 years on average; the figure for women is about 2.5 years.

Considering the gap between those who will need long-term care and those who have purchased insurance, is now the next best time to buy LTCI? There are some strong advantages in purchasing a policy, especially if you are in your 40s or 50s. At that age, the premiums are less expensive. Moreover, young policyholders guarantee their insurability.

Today’s policies have also improved in at least one aspect. Most policies will pay for care in a nursing home, assisted living facility or adult day care center, or even at home.

Policies generally pay, up to a predetermined limit, for a variety of situations. Coverage for dementia and other severe cognitive impairments is fairly standard. Other “normal” coverage includes seniors who can’t perform two or more activities of daily living (ADLs). These generally are personal hygiene, continence management, dressing, feeding and ambulating.

The big disadvantages of LTCI mirror the advantages. Like most insurance policies, you can pay into a policy faithfully for years or decades, totaling tens of thousands of dollars or more, but have your coverage denied. You could pay in for decades and then be priced out of your premiums. It’s also possible for the coverage to change and not be as comprehensive as you expected.

Finally, it would be hard to count as a disadvantage the scenario where you hold long-term care insurance and pass away never having needed long-term care. In that case, your beneficiaries will be happy you didn’t suffer, but they may have lost any inheritance to LTCI premiums.

CONSIDER THE ALTERNATIVES

You might consider short-term versus long-term insurance. Short-term care coverage would kick in when Medicare coverage ends. Short-term coverage is less expensive, easier to qualify for and may not contain a deductible.

However, short-term coverage won’t help for needs lasting longer than a year. You can only buy it a year at a time, so chances are you won’t be offered a new policy if you are using the benefits. It is not regulated to the extent long-term coverage is, so you have to check carefully for important details such as guaranteed renewability.

Sometimes life insurance policies can be used to pay long-term care costs. Such modified life insurance policies have long-term care riders, which are becoming more popular. An immediate annuity is another consideration for covering LTC costs. Tax consequences accompany each of these decisions.

If you can earmark at least $250,000 of your retirement funds for a potential long-term care need, you might consider self-insuring. If the money is not needed, there’s more for your heirs.

If you can’t set aside that amount, you can pay down your funds for your care, after which Medicaid will kick in for nursing care. You will be limited to facilities that accept Medicaid. Beware circumventing by giving your money to your kids since there’s a five-year lookback period.

An unreasonable alternative is to stick your head in the sand. Trees can’t grow in sand, nor can a solution for the unknown future of your old age. See a fee-only financial planner. Explore the branches now, while you have options. 

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