Expect the Unexpected with Long Term Care Insurance


I recently learned that two-thirds of the new claims under Long Term Care policies are made by women.  The largest claim ever made as of 2011 was for a woman who had been receiving care for almost 15 years at a total cost of $1.7 million!

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A week does not go by that I find myself engaged in a conversation about Long Term Care (LTC) Insurance (www.longtermcare.gov) with my women clients and friends. The comments and questions are always interesting and highlight that this valuable risk management product is not fully understood or appreciated by the group that it benefits most – women.

Commonly I hear:

Do I really need LTC insurance?

At what age should I consider buying it?

I don’t need it because my children will take care of me.

I plan to self-insure with my assets.

So how do you evaluate your need for Long Term Care insurance? 

Why Should I Buy

There is no rule of thumb for who is a good candidate for LTC.  Each situation needs careful evaluation.  Begin by engaging a financial advisor who has no financial interest in your decision.  The most important input they can provide is whether your asset base is adequate to take care of your long term health needs by taking your unique circumstances and specific goals into consideration.

Married couples face the risk of one spouse drawing significantly on assets for a lengthy health problem, thus depleting assets for the surviving spouse.  In some instances it can make sense to insure the wife only.  She will outlive her husband by five years on average (visit www.livingto100.com for a longevity calculator).

Couples who desire to leave a financial legacy to their children put their assets at risk if a lengthy health problem occurs for either or both spouses.  Life insurance and annuities can be used as alternative sources of assets in these instances.  Their effectiveness should be evaluated by a financial advisor against long term care insurance by taking price, payout, timing and flexibility of product into consideration.

Consider that the option of relying on your children may be fraught with risks.  While their stated intentions are good, their future financial condition may make it hard to act on those intentions.  Additionally, will your children be willing or able to tend to you if you are subject to a health condition that requires highly vigilant or specialized care (ex. advanced COPD, dementia)?

A single woman might be inclined to “self-insure” with her existing asset base.  She has no responsibility to anyone but herself and may not care if her assets get drawn down due to an extended health problem.  However, projections show that even the heftiest nest egg may be decimated by future nursing home costs.

When Should I Buy

The earlier you buy, the cheaper it is.  But we want to use our dollars efficiently in committing to an annual insurance premium no matter how reasonable the price.  The longer you pay the premium, the more you have invested and consequently your return on investment becomes more uncertain.  What is unknown is whether you will ever use it, and if so, at what age, and then, for how many years?  We can reduce some financial uncertainty by looking at family history – is there a pattern of poor health in the family, for instance for diseases like Alzheimer’s, that suggest long term care will be more probable than not?  This information helps affirm a decision to buy at a younger age, when rates are lower.

Buying later than sooner exposes you to the chance that a health problem will occur before you purchase.  You now face the possibility of a higher annual premium than you would have otherwise had, or worse, you face potential ineligibility.  Insurance companies vary in their practices regarding pre-existing conditions so it is best to “shop” around.  If you are fortunate to have access to a company-sponsored plan you are likely to find there is less,  or even no, emphasis on the medical underwriting process (i.e. evaluating a person’s current and past health record for purposes of pricing and strucuring insurance coverage).

Changes in the industry are a consideration in timing of purchase.  The LTC insurers mispriced policies in the past and as a result are reassessing their pricing structures.  Expect policies to become more expensive and less attractive going forward.  And also, while they are not gender-oriented today, they could become so in the future.  Women are two times as likely as a man to file a claim, so gender pricing could cause less favorable premium rates for women in the future.  The industry is also considering the elimination of inflation-protection in payout, a potentially negative development given costs rise faster than general inflation.  According to MetLife’s 2011 National Survey of Nursing Home Care, between 2011 and 2012 the average national expense for assisted living communities rose by 5.6% and for private nursing rooms by 4.4 %.

Summary

As women, we tend to be planners.  What is your plan for health risks later in life and how do you intend to pay for that plan?  Long Term Care Insurance is a serious option, one you should discuss at length with your financial advisor.  It is never too early – or late – to start a conversation.