By Dr. James M. Dahle, WCI Founder

Q: Should I Buy Long Term Care Insurance for My Parents

My wife and I have been advised to purchase long term care insurance for our parents. It's unlikely that either family could afford $65K/yr to care for themselves if needed. It's for them, but essentially is insurance for us and our assets. Do you have any thoughts about this? Do you have any recommendations in general regarding features, good companies, etc?

A: WCI Recommendation:

Long-term care insurance is one of the most disappointing aspects of personal financial planning. There is no doubt that long-term care is expensive and worthy of insuring against, but there are so many complications when it comes to long-term care that it doesn't make any sense at all for many people to buy it for themselves, much less for someone else. Like many types of insurance, it tends to be sold, not bought, and those who know the most about it are also those who have the biggest financial conflict of interest with regards to your buying it.


Save Money on LTC by Medicaid Planning

Many of us have this image of being incontinent and demented and dying a slow, stinky, painful death living in a cardboard box on a sidewalk somewhere. Certainly I'd rather shell out for long-term care premiums than face that. But that really isn't the risk.  In fact, the government has decided that everyone can have long-term care, free of charge, as long as you're poor enough  It's called Medicaid. “But I don't want to live in a Medicaid Nursing Home,” you may say, “I want a nice one!” If you have thought this, I suggest an exercise.  Call up a few of the nursing homes in town and see if they take Medicaid.  You'll quickly realize that almost all of them do, and that those who do not are not necessarily any better than those that do.  So you're not necessarily buying a higher level of skilled nursing facility when you purchase long-term care insurance.  This shouldn't surprise anyone in the medical field.  Do you provide a lower standard of care to a Medicaid patient than to one with real insurance?  Generally not.

So for those who are truly destitute (as defined by your state), they have no need to purchase long-term care insurance.  The state provides it!  Even if you're not destitute when you need the long-term care, you just need to spend your money on long-term care until you are and, voila!  You now qualify for Medicaid.  In most cases, you don't even change rooms at the facility when you go from self-pay to Medicaid.  The staff will even help you and your family fill out the Medicaid paperwork.

Most people don't want to spend all their money on long-term care.  They would rather blow it on something more fun. A lot of times people don't spend all their money and end up leaving it to their spouse (who doesn't need long-term care) or as a last resort, to their kids.  Enter Medicaid planning.  The point of Medicaid planning is to look destitute, while not actually being destitute.  While these laws are state specific, most states allow your spouse a certain amount of assets and income and allow you to give some stuff away to be destitute enough to qualify for Medicaid.  They generally have a “look-back period” of up to 5 years, so it pays to read your state's laws carefully before trying this arguably immoral scheme.


What Is Long-Term Care Insurance For?

The point of long-term care insurance is to avoid having to use all your remaining assets on long-term care, not to avoid living on the street.  Like life insurance, it's for the financial comfort of your spouse and loved ones.


Long Term Care Insurance vs. Self Insurance

Most Docs Should Self-Insure Against Cost of Care. Long-term care is expensive, but it isn't like being sued for a million bucks or having a baby in the NICU for 6 months.  According to Genworth's handy calculator, the average cost of a single room in a nursing home in my state is $72K per year, and ranges from $61K in Texas to $125K in New York.  $72K is a lot of money, but it isn't for someone with a couple of million in assets or an income of $150-200K per year.  Home health aides, adult day care, and assisted living are even cheaper.  Most doctors who follow the advice on this blog shouldn't have any trouble amassing a nest egg of $2 Million.  (20% of a 200K salary x 30 years at 5% real = $2.8 Million). Even if you're in the nursing home for 10 years ($720K) that's not going to deplete the nest egg.  With insurance, the cheapest option is always to self-insure, as long as you can handle the consequences.  Most doctors can self-insure long-term care.  But what if you end up needing long-term care before you've amassed that nest egg?  You should have long-term disability coverage to meet that need.


The People in the Middle

The people who can really benefit from long-term care insurance are the well-to-do married middle class.  I'm talking about those with nest eggs of $250K-1.5 Million without any pension.  If you're single with no one depending on you financially, well, no big deal.  You spend your nest egg on long-term care until you're broke, then Medicaid kicks in.  But if all your income is going toward long-term care, what is your spouse going to do?  These folks could really benefit from long-term care insurance.  Unfortunately, long-term care insurance sucks.


Is Long-Term Care Insurance Worth It? 

Long-term care insurance is far more similar to disability insurance than it is to life insurance.  Life insurance is very straight forward.  You're either dead, or alive.  Those in my line of work know there's a little more nuance to it than that, but suffice to say that by this afternoon, the nuance will be gone.  But if life is white and black, disability is 50 shades of grey.  Long-term care insurance is more like that.  You get to argue with the insurance company that you really need long-term care.  You may just want someone to come in to the house and make you a meal and help you bathe, but they think you can do it yourself.  To make matters worse, your premiums generally aren't guaranteed, and if you make payments for a decade or two and then the company goes out of business (because they weren't charging enough or weren't run well), you'll have to start all over (with higher premiums) if you can still get insurance at all.

These are not mere theoretical concerns.  Michael Kitces, at Nerd's Eye View, notes that Genworth (40% of the marketplace) scaled back its options dramatically last year, including the elimination of the unlimited benefit period.  That's like buying disability insurance that only pays you for the first few years of disability.  That's not the financial catastrophe you want to insure against.  Prudential and Unum have left the marketplace completely.  Many companies have also raised premiums on older policies.  These policies are definitely written in the insurance companies' favor.

Erik, one of the Bogleheads, recently argued:

No, it's not the case that people without long term care are simply ostriches.  Many of us aren't falling for the illusion of peace of mind when it is obvious that, in its current state, the LTC insurance market is dysfunctional; it's simply not working the way other insurance markets like homeowners and auto insurance do….

Can anyone be confident that the package of services they're buying today will be sufficient to cover their needs in the future?  With homeowners insurance, you know what you're getting if worse comes to worst: a new house that will be comparable to your previous house. There are many levels of care assistance that might be required later in life, and there's a very significant likelihood that you won't even understand the decision, let alone participate in it.

I'd love to see an LTC insurance market that looks and works like auto or homeowners insurance, with well defined costs and benefits, and that provided the typical insurance advantage of spreading risk. But that's not how it appears to me.  No, I worry that it may be the people who are buying LTC today, with the expectation of using it 20-30 years from now, who are the ostriches.


Buying Long Term Care Insurance On Others

My retired parents own a LTC policy.  I think that's great.  They're middle class folks with a good pension and a  nest egg falling into the “middle range” discussed above.  If the policy actually pays out, I may get a slightly larger inheritance that I am unlikely to need anyway.  But if I were in the situation of the questioner above, and an adviser were recommending I buy LTC insurance on my parents, well, that's a completely different issue.  First, I'd question his motives a little.  How much does he stand to make if I follow his recommendation?  Second, what is the big deal to me if my parents and/or in-laws have to spend down to Medicaid levels.  If they can't afford to self-insure this risk, it's not like I have to pay for it.  Medicaid will pick it up.  Even if my choice is between paying premiums and possibly getting a larger inheritance or not paying premiums and possibly getting a smaller one, I'd be more inclined to take the bird in the hand.  But what about my mother-in-law if my father-in-law goes in to the nursing home and spends all their money?  I suppose some might prefer to pay LTC premiums rather than be in the position of having to support their mother in law financially, but I think I'd rather self-insure that risk.


The Features I'd Want in a Long Term Care Policy

If I were going to buy a LTC policy, I'd want a policy with an unlimited payout of unlimited duration, but with a significant deductible, perhaps even as high as 2-3 years worth of care, or perhaps a $10-20K deductible per year.  I'd want to make sure it covered care at home, assisted living, and a skilled nursing facility.  Benefits should be indexed to inflation of LTC expenses (not just CPI-U).  The goal would be to insure against the financial catastrophe, and self-insure the rest.  Unfortunately, I don't know of a policy on the market that meets these very limited criteria.


My Plan for Long Term Care Costs 

Those planning for retirement should be cognizant of the possible additional burden that LTC can put on a retirement plan, and ensure they have sufficient assets/income to be able to cover these costs.  I expect to annuitize a significant portion of my nest egg using SPIAs, to cover a basic standard of living and use the rest of the nest egg for variable expenses (like vacations and long-term care).  An adequately sized nest egg combined with guaranteed income should allow me to cover LTC for myself and/or my spouse without having to ever spend down to Medicaid levels or resign the remaining spouse to a cardboard box.

What do you think?  Do you own a LTC policy?  Do you plan on buying one?  Would you buy one on your parents?  Why or why not?