Much of today’s population will eventually require some form of long term medical or personal assistance care as they age. How these people receive and pay for services will drive their long term care (LTC) experience. Even if you think you are well versed in the ins and outs of LTC, you might be surprised to know that long term care includes a surprising range of services and complexities.
Long term care support may occur on-site (nursing or assisted living) or in-home, and includes restorative health care and help with daily activities such as bathing, dressing, taking medications, shopping or housework. For a variety of reasons, long term care costs continue to accelerate faster than inflation.
Premiums increase and policies decline
In 2018, the average on-site long term care expense (per the U.S Cost of Care Survey) was $7,441/month for a private room. That said, a 17-month stay in a long term care facility (the median for women; men typically stay for less than one year) comes with a price tag of $126,504.
The long term care insurance market, in an attempt to forecast social, economic and industry changes, badly miscalculated how many policyholders would make claims on policies written in the 1990s and early 2000s, leading to higher premium costs for new policies, price hikes for existing policyholders, and an exodus of many larger insurers from the market. On one hand, the cost to transfer this risk has become very expensive, but on the other hand, the experience reveals a trend in increased need for LTC coverage. At this point, we cannot be certain whether we are still on the upward swing of this need/trend or if we have reached the peak.
According to financial industry commentator Michael Kitces, a typical long term care policy written in the mid-2000s has endured premium increases of nearly 70%. Not surprisingly, sales of long term care policies are down by 65% since 2004.
Cost is not the only reason for fewer policies. Insurance industry advocates American Association for Long Term Care Insurance claim that 30 to 40% of applicants are turned down for health reasons, and a denial from one insurer will often lead to denials from others.
Recently, insurance companies brought to market hybrid policies which combine LTC with life insurance, effectively pre-paying the LTC care expenses via a large, one-time premium or annual premiums. Expect for providers of these policies to suggest various riders and benefits that may or may not be valuable, and that always come at added premium costs.
Hybrid policies have their own limitations: you may never utilize all of the benefits you’ve paid for, and you may not be able to make use of the life insurance component. To weigh its pros and cons, consider the opportunity cost of the large, upfront premium. How could those dollars grow over 10, 15, or 20 years? An argument can be made for simply accumulating funds that would otherwise be spent on long term care insurance premiums, which could allow one to effectively create his or her own “self-insurance fund”.
The case for self-insurance, whole or partial
Various reasons exist among SYM clients for choosing to purchase or pass on some form of long term care insurance. Some clients with the ability to self-insure instead elect to purchase coverage to protect the value of their estate for children and grandchildren.
One modification used by SYM clients is to insure only a portion of the anticipated need: for example, enough coverage to provide two years of care and any remaining costs of care will be funded from other assets.
Various other considerations may be used to alter the risk/cost profile, including adjustments to the average daily benefit (generally $100-$200), the Policy’s inflation rider (none, 3%, or 5%; the lower the inflation adjustment, the lower the premium), or the elimination period (90 days is standard, but pushing to 180 days can lower premiums).
It is valuable to discuss long term care options as a part of your overall wealth planning with your advisor and your trusted insurance provider. While most SYM clients choose to self-insure, we also understand that some will be strongly motivated to buy this type of coverage. Your SYM advisor is prepared to discuss the impact of long term care costs on your financial plan and can model various scenarios to help you feel comfortable that this area of your financial life is in order.