Q.
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.
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.
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 coke and hookers. But demented people have trouble locating a dealer in a nursing home, and it’s tough to sneak the hookers past the front desk, so they settle on the next best thing, 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.
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.
Most Docs Should Self-Insure
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.
Bad Insurance
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 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
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
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?
You say:
“But what about my mother-in-law if my father-in-law goes in to the nursing home and spends all their money?”
In California the “Community spouse”, the one who doesn’t go in the nursing home, is allowed to retain $115,920 plus IRA’s in the community spouse’s name, household goods, personal effects, a car, the house, jewelry, etc. are all totally excluded, regardless of value, and the at home spouse can retain these, as well as the CSRA of $115,920.
Also:
California law allows the community spouse to retain a minimum monthly maintenance needs allowance (MMMNA) of $2,898. This amount is adjusted annually by a cost of living increase. Under the “name on the instrument rule,” the community spouse may retain any income received in his/ her name alone. It is important to note that the $2,898 amount is a floor.
Thus, if the community spouse’s monthly income is less than the MMMNA of $2,898, he/she may receive an allocation from the institutionalized spouse’s income.
Thanks for a great article.
I think the original question had more to do with filial support laws, which were not addressed at all in the response. A google search of “filial support laws” should familiarize the interested reader with the nature of these laws, and the many states where financially responsible adult children could be held financially accountable to provide (in part) for their parents.
The main part of the filial support law in my state was repealed in the 1970s and the other part has never been enforced. I suspect the experience in most states is similar.
PA is enforcing, as States are going broke providing for Medicaid.
Interesting. As if anyone needed another reason to leave PA. As I recall it has some brutal estate/inheritance tax laws as well.
Good write-up. I’m not a fan of LTC insurance (I don’t sell any insurance). It seems to be an expense that’s better for those who don’t have the discipline to save on their own and expect to need it.
It’s similar to the difference between whole-life and term-life insurance. Term-life seems to be a better longer term option for those who invest the difference. If the insured would invest the premiums in their own accounts, they should be fine by the time they need it. If they don’t need the LTC, they have more to live on and/or pass down.
For those who buy LTC, but don’t save enough for retirement, their risk is in staying healthy and living outside of assisted living.
it isnt similar to whole life vs term. Those who need help saving the premiums are exactly those with the highest lapse rates for whole life. Anyone who cant save the difference/invest the difference should avoid the products.
It seems the same people who are at risk of lapsing on their whole life insurance would lapse on their LTC and shouldn’t buy either.
if thats what you meant then i agree
My father spent 10 plus years in assisted living because of macular degeneration combined with insulin dependent diabetes. His room rent was about $2200 per month which included some nursing care, food, transportation, and utilities. His civil service pension was around $3300 per month. He had around $600000 in CDs. He had a negative cash outflow only in the last 6 months after a stroke at age 92. He elected to stay with assisted living with 24 hour sitters rather than going to a real nursing home. He did not have LTCI. I really think it would of been one more layer to deal with. I think SPIA combined with social security at age 70 will work well with maximum flexibility.
additionally most polices one can reasonably purchase today are limited to 3-5 years so likely he would have been in a similar spot. As you mentioned, he didnt need to deal with the layer as well. He decided to do it and paid for it. I have a colleague whose mother went into a nursing home. She did have LTCi and talking to this friend he couldnt see any reason why it wasnt paying (he is also a lawyer prior to med school). Even he had to get help from a separate lawyer to get payments started.
On a different front- is no one bothered by the gaming of a system for the poor? Don’t get me wrong, my own family has used medicaid for nursing home care. I am not saying that the suggestion is out of the mainstream. The fact that so many people do it without a thought is what troubles me. I find it sad that medicaid is used to protect the affluent or middle class from having to see grandma die. Or actually paying to have that feeding tube placed. No, make Mom and Dad seem poor that way I dont have to take them in and even better I dont have to pay for their care. I think if someone was paying for this stuff there would be fewer contracted demented patients that we were “doing everything for”.
I agree there’s a moral issue there.
When my grandmother was in a nursing home many years ago, the nursing home did many interventions that she did not want, and we, her family, did not want. But they could charge for it, keep her alive a little longer, and therefore keep the bed occupied. That was one of the few times so early in my career where I saw $$$$ as the major influence in someone’s care. (I see it more now than ever before, right or wrong)
According to http://www.ltcoptions.com/, long term care insurance providers offer coverage that range from $1,000 to $7,000 in a year. It’s steep for most people but they need not worry because there are variety of ways to make their rates affordable. They can design a smaller policy, choose a shorter benefit period or lesser benefit amount, avail discounts and by purchasing early. Having a private insurance is more secured for me rather than relying on what the government has to offer. Government programs offer long term care benefits that are limited. It’s better to take matters into your own hands than to rely into something that will only provide you with limited benefits.
Please know that you have an extreme lack of information on long term care aspects. I made up a saying when I was working with a head set on as an Expert Senior Living advisor – I would have callers complain: “Why didn’t my physician tell me this? Or my case manager? Or my DME” – I needed firstly to calm them down, so I would say:
“Everybody knows a lot about everything, but nobody knows everything about it all….and sometimes we all make mistakes” – the last part would make them chuckle a little and I’d go on with my advisement. So I will advise you that you have some flaws in your advice on long term care, and – yes, I AM VERY qualified to teach long term care.
I spoke with thousands of distressed family members calling and here were the common themes:
1) Shock that MediCARE does NOT pay for the nursing home (beyond the rehab located w/in a nursing home if patient is deemed able to do PT etc and THEN only following a 3 DAY/night stay in a hospital and only “up to” 100 days. If Dad/mom shuffled into old age disability w/o the hospital stay, no initial Medicare coverage
2) Stunned that Home Care can cost as much or more than an Assisted Living
3) An overall lack of knowledge about the beautiful Assisted Living options and CCRC’s out there (THANKS Baby Boomers!)
4) Disappointment that, no – you can’t buy “traditional long term care insurance” now for mom/dad will never get through the underwriting (actually there are 2 products which may be used here – but most don’t know about)
You may view my credentials under Google: Carole B Starr MBA Retirement Planning
Oh, and by the way – our parents “Financial Advisor” advised our parents to stay in the market and not buy Long Term Care – Mom, at age 96 is in a very beautiful assisted living – with ice cream parlor/juke box…Hoyer Lift bowel and bladder incontinent – but can still grand slam you at bridge – her care is superb – no skin break downs – a happy place at $10,000/month -she is in her 4th year and running out of money (Mom and Dad lived happily in a LOW level of care for 4 years prior at the national average cost of $3,000/month….lost Dad – Mom went to the ER came out incontinent and feeble). HAD they bought the policy I recommended at the time, we would not be worried about her finances. Everyone now regrets not buying the LTCI
Anecdote is not the plural of data. It is hard to get dispassionate advice about a product from someone who makes a living selling it.
I wholeheartedly agree. Like in medicine the diagnosis is always obvious after it has been made.
These scenarios appear to be talking about people in retirement age. I may have overlooked a scenario for purchasing LTC for a young person, so I have some questions. For example, my wife is a stay at home mom without any income and is therefore not able to sign up for any disability insurance. We are in our early 30’s and are serious minded about debt elimination (student loans). I am an associate dentist and own my own LLC (S-corp) and have a DI plan for myself. I am most worried about a scenario that may require LTC for my wife that would essentially drain me financially as we are starting our debt elimination journey. Potentially 60K a year in care expenses would be devastating. I don’t think LTC insurance is something I would want to carry for a long time, but wonder if there is any sense to having it now while I am not self-insured. I may have a severe lack of understanding of LTC insurance and what it can be used for, as well as the age at which it can be used, but from what I can tell you are eligible to use it at any age when deemed necessary.
I understand I am being extremely paranoid and the likelihood of anything devastating happening is low. I am pretty aggressive with my insurance plans/coverages to protect my future earnings and wonder if this is another layer that is worth adding on.
Any feedback is appreciated.
Not commonly bought at that age, but if you can find someone to sell it to you, should be pretty cheap.