Is Long-Term Care insurance worth it?

Long-Term Care insurance premiums have been on the rise. Long-term care insurance premiums can be hefty, leaving many policyholders wondering, “Is Long-Term Care insurance worth it?”

Let’s simplify the question: If you were to need care, how would you pay for it? Here are the average annual costs of Long-Term Care services in the U.S. according to Genworth¹:

You might have sufficient personal assets in savings or investments that would allow you to pay for care throughout the rest of your life. However, this might exhaust your assets by the time you pass, leaving nothing for your loved ones. A Long-Term Care insurance policy can be a viable option if you want to leave money for your loved ones while fully covering your Long-Term Care needs. Also, if you can’t afford the cost of care for your expected lifetime or aren’t sure, then a good Long-Term Care policy may be worth it.

While life insurance carriers have years of historical and actuarial data about life expectancies to help influence their premium rates, the Long-Term Care industry only goes back a few decades. This means Long-Term Care insurers had to make some estimations about the LTC policyholders’ behavior in 15 to 20 years, such as whether you’ll file a claim, how long you’ll live after you file and how many policies will lapse.

Unfortunately, many of those assumptions weren’t accurate. When policies were issued in the 1990s and early 2000s, companies estimated a 4% lapse rate, but as years when on, only 1% dropped their policies.² Additionally, the life expectancy of people has increased, which results in more claims being paid out in benefits and generally for a longer period of time than the companies initially anticipated. As a result, the insurance companies aren’t earning enough in premiums to pay all the claims being filed, so they’re raising the rates.

Insurers gave themselves the right to raise rates in your contract. But to impose a rate increase, they must get the state insurance commission’s approval. Regulators often reduce or reject price increases, so if an increase is approved, the commissioners believe it’s necessary.

Your family medical history also matters when determining whether the cost of Long-Term Care insurance is worth it. For example, Alzheimer’s patients live longer in nursing homes than other patients, which could drive up lifetime costs substantially. According to the U.S. Department of Health & Human Services, women are more likely to need care longer than men. You may not want to gamble that your assets will be sufficient for your care needs over your lifetime.

When choosing a policy, we suggest reviewing your family health history and meeting with a financial advisor who can review your financial situation comprehensively.

Because traditional LTC coverage today is more expensive than ever, hybrid policies that combine the benefits of whole life insurance and LTC benefits are becoming more popular. One key advantage is that money is returned to you if you cancel the policy without having received benefits, or to your heirs if you die without receiving benefits.

One important caveat, though: Don’t buy a hybrid policy solely because of the death benefit. Buy it for the LTC value. While LTC premiums might cost you a few thousand dollars a year, they could prove worth it by helping you handle tens or even hundreds of thousands of dollars per year in medical expenses.

About 7 in 10 people (69%) turning age 65 today will need some form of Long-Term Care services – either in their home or in a facility, according to the Administration for Community Living, a part of the Department of Health and Human Services. Your health insurance doesn’t cover the cost of nursing home care. Neither does Medicare.

That’s where Long-Term Care insurance comes into play. Generally, the following three groups of people consider buying it:

1. Those who can’t afford to pay the cost of care on their own.
2. Those who can afford it but who wish to transfer the risk to an insurance company.
3. People who are interested in legacy planning and who wish to leave substantial assets to their heirs.

The cost of LTC policies and coverage varies widely among companies, so we recommend you shop around. But here are some features you should look for:

• The amount of coverage you need should at least equal the cost of a private room in a nursing home in your area. The current average cost nationally is $290 per day, or $105,850 per year, according to Genworth’s annual Cost of Care Survey.
• At least three years of coverage for the first spouse. Five or six years is better – or even more if you have a medical history of chronic health issues such as Parkinson’s or Alzheimer’s disease or dementia.
• If you choose to forego a long benefit period, consider a shared-care rider, which lets you use the benefits of your spouse’s or partner’s policy if you exhaust your own benefits. For example, if each of you buys four years of coverage, the rider gives you a total of eight years you can share. You could use five years and your spouse three years, for example.
• A 90-day waiting period for benefits to kick in. This reduces the cost of the policy, but it also means you must have enough in cash reserves to afford paying the bills during the waiting period.
• Inflation protection. Because the cost of care increases over time, make sure you get at least a 3% annual cost-of-living increase in benefits.
• Designate the right gatekeeper. Who certifies that you need substantial assistance to perform daily living activities or that you have severe cognitive impairment? It should be your doctor – not the insurance company. Also, how disabled must you be to receive benefits? Choose a policy that offers the most liberal definition.
• Home health care. This covers home visits by a nurse or home health aide to assist you with medication and essential activities such as bathing and preparing meals. Make sure the coverage for this is the same as that for facility care – not a fraction of it.

In some cases, if someone can’t afford the level of care needed, family members take on the role of caregiver. However, caregiving can significantly impact the lives of your loved ones, and in some cases may want to be avoided. According to Genworth³:

• 43% of caregivers said caregiving negatively affected their relationship with their spouse/partner.
• 51% of employed caregivers said caregiving negatively affected their ability to do their jobs.
• 51% said they’re health and wellbeing were impacted.
• 66% paid for care with their own savings or retirement funds.

Long-term care insurance can not only give you the necessary funds to receive the care you need, it can save your family precious time, money and stress.

Despite the issues around rate increases, Long-Term Care insurance is worth it in most cases. As advisors, it can be difficult to watch someone who needs care deplete their assets in a few years because they didn’t have optimal coverage.

Your coverage, despite its cost, is important, and we wouldn’t advise you to get rid of it. If you feel it’s unaffordable, see whether the insurer will let you reduce the benefits in exchange for lowering the cost.

If you’d like a second opinion, talk to us. We can help you decide what kind of Long-Term Care insurance you need and how much, what policy features you should have, and how to make sure you can afford it.

1 Genworth. (2021). Cost of Care Survey. Retrieved on December 13, 2021 from genworth.com

2 American Association for Long-Term Care Insurance. Long Term Care Insurance Policy Rate Increases. Retrieved on December 29, 2021 from aaltci.org

3 Genworth. (2021, November 16). How Caregiving Impacts Families, Communities and Society. Retrieved on December 14, 2021 from genworth.com