The Long Term Care Decision
In the world of personal finance planning, there are few things that cause more anxiety than estate planning. Determining the need for long term care insurance happens to be on that list. With estate planning, you meet with a lawyer, sign the documents, write the check and head off to a bar for a nice cocktail to reward yourself for being a responsible adult. I won’t say that you never have to think about it again, but you certainly don’t need to relive your estate decision-making process every month.
On the other hand, the decision to purchase, or not purchase, long term care insurance is not only fraught with emotion, it is famously expensive. Every month (or quarter, or year) that you see the premium deducted from your bank account, you get to relive the pain that you went through in making the decision.
It is not just the cost of long term care insurance that makes it a tougher call than other types of insurance decisions; it is also the uncertainty of the cost. In recent years, many policyholders have faced steep increases as insurance companies reset their premiums after having initially set them too low. Additionally, it is not yet clear that the days of large rate increases are behind us.
Spoiler alert: This blog will not conclude with a pro or con recommendation. The decision to get long term care insurance is too specific to each person’s circumstance and preferences to come down squarely on one side or the other. But what I will do is take you through the year-long decision process (yes, it took that long!) that my husband and I went through, which did in fact conclude with us purchasing long term care coverage.
Life expectancy. Barring an unfortunate meeting with a bus, based on our good health and family history we both expect to live a long life. And so the possibility that one or both of us would need the kind of medical care covered by long term care insurance is a very real possibility.
Availability of in-home care coverage. When people think of long term care insurance, the immediate thought is “nursing home.” But in fact, most stays in nursing homes are comparatively short for the unfortunate reason that when a person goes to a nursing home, in most cases they are nearing the end of their life. (According to a 2010 academic research study, the majority of residents stay less than six months.) What we wanted to gain from long term care insurance was the ability to pay for assistance while living in our home, which while less expensive than a nursing home, is still very costly. It was important to us to have coverage for this as it is not covered by Medicare.
Running the calculation. To “self-insure” means to save enough money on your own to cover what an insurance policy would cover. There are different ways to approach this and I would never argue that our thought process was “the best.” But it worked for us on an intuitive level; it was an analysis that we were personally comfortable with and willing to own.
First, we looked at the amount of coverage that we would potentially receive if we fully collected on the policy. We then considered whether or not this was an amount of money that would likely be adequate, or at least adequate along with other resources. Check. We then calculated how much we would need to save on our own to get there, assuming compounding and the like. What we saw was that if we wanted that same amount of coverage, we could not realistically save that amount of money.
Flipping the coin, we also calculated how much we would amass if we took an amount equivalent to the premium and invested it on our own. The result was not one that gave us confidence that we would be adequately self-insured for long term care. At the time of this decision, I had just turned 50 and my husband is seven years older. Unlike saving for retirement, we would potentially not have decades and decades for these savings to grow.
In short, while we have what we consider to be pretty okay retirement savings, we nevertheless found the potential cost of long term care to be daunting and felt that our budget could stretch to accomodate the cost of the premium.
But what about Medicaid? After you have exhausted all of your assets, Medicaid can pay for long term care. Well, that’s good to know, but for a couple, that strategy could leave the surviving partner in a bit of a pickle. In addition, while I am far from expert on this, my spidey-sense tells me that the care options that would be available under Medicaid would not be the same as what would be available through private resources. (This may vary by state and it would be a good thing to research when considering this option.)
It really is not an all or nothing decision. We have faced one premium increase in the last six years of 33%. We took that as an opportunity to trim back the coverage just a bit, in order to keep a similar monthly premium cost. That is, we chose to self-insure more. And while I hope that we won’t have to do this again, that is always an option.
This reminds me of a final point. It may not be you who is wrestling with this decision, but rather a family member. My mother did get long term care insurance and when she faced a premium increase two years ago that was more than she was comfortable with, we made a deal. She kept the coverage and I split the cost with her. As I told her at the time, her insurance covers not just herself, but my assets as well. Should she need this kind of care, I would not hesitate to provide it. My husband and I agreed that paying 50% of her policy premium was a sound insurance policy for us.
These days, long term care coverage can be purchased in a couple different ways. When we were in the market, the traditional stand-alone policy was all that we knew about. But now there are hybrid long term care policy options in the marketplace. These hybrid policies respond directly to a couple of the pain points for many people. One, that in the happy event that you never need the coverage, the premiums are “wasted.” And two, that premiums can rise, perhaps substantially. In a very small nutshell, a hybrid long term care policy is a rider to a whole life insurance policy that allows some of the death benefit to be used for long term care. And if such care is not necessary, then the full death benefit will be paid. It’s a fairly complex decision but it is an option that can work for some people.
As I said, at the end of the day, this is an intensely personal decision. My goal today is not to sway you one way or the other. The important thing in my view is for every household to come to a deliberate, well-considered plan for long term care that they are personally comfortable with, rather than not face the issue at all. And then after that, head out for that cocktail!