$tarrBuck Report July 30, 2006: Should You Buy Long Term Care Insurance?

July 30, 2006

$tarrBuck Report July 30, 2006: Should You Buy Long Term Care Insurance?

No one wants to go into a nursing home for old age assistance. Much better to live in your own home and die in your own bed. Most 65 year olds will never enter a nursing home in the rest of their lives. But disabilities of age lead many elderly to nursing home care, typically after age 80.

How likely is a nursing home stay?
A 65 year-old man has a 27% chance of entering a nursing home at some future time. Once he’s entered, the average stay is 16 months; an eighth of men entering a nursing home spend more than three years there.
Women live longer than men, and men are often disabled with a still-healthy wife to care for them at home. A 65 year-old woman has a 44% chance of entering a nursing home at some future time and her average stay, once entered, is two years. An eighth of women in a nursing home will spend over five years.

How much will a nursing home cost?
The cost of nursing home care depends where you are and the quality of the home. The national average cost is $143 per day. In the coastal metropolitan areas of the US (NYC, DC, Boston, LA, SF), expect $150 to $200 per day. That’s $50,000 to $75,000 a year, more than most people can afford. Especially for a prolonged stay.

Who pays if you don’t? Medicaid!
Over a third of nursing home care is paid for by Medicaid (not Medicare) the joint Federal-state insurance for the medically indigent. There are very firm spend-down requirements for Medicaid eligibility. First your money pays for your care; when your money is nearly exhausted, Medicaid kicks in.

What does long term care insurance do for you?
Private long term care insurance provides all or part of the cost of nursing home (and in some cases at-home) long term care. There is usually a waiting period (an insurance deductible) of days or months during which you’ll pay for your own care. Then your insurance kicks in. It may have a limited term of benefits — several years, as much as you are likely to need — or last your whole remaining life.
Only a small fraction (around 4%) of long-term care expenses in the US are paid for by (non-Medicaid) insurance. The limited number of people with insurance and the limits of coverage make sure of that.
If Medicaid is going to pick up the tab eventually, why should you insure at all? For most people of average income and wealth that’s precisely the right question. Long term care insurance is expensive and substitutes for government-provided Medicaid. Most people will not find it a good use of their money to insure long term care.
For people of substantial income and wealth — wealth that may be called upon to finance long term care — long term care insurance fulfills three principal needs:
> It provides the assurance that convenient financing of prolonged care is available so that you and your family do not have to worry about accessing and liquidating assets to cover the cost. Insurance can protect your money and avoid disagreements in the family.
> It assures the value of your estate for your spouse and your heirs.
> It assures your nursing home, when you apply for admission, that their bills will be paid in full, not at the reduced Medicaid rate. All nursing homes are required to have some Medicaid-eligible beds. But there is always a shortage. Your insurance assures you and your family that your choice of accommodation will not be limited by financing.

What about inflation?
A long term care policy specifies a maximum daily benefit — typically keyed to the average prevailing cost of care at the time you insure. But those costs are likely to go up by the time you’re ready for benefits. If you’re buying a policy, getting the inflation coverage makes sense. It’s generally set at a fixed annual percentage, not indexed to the actual inflation rate. Still, better than nothing.

When should you buy long term care insurance?
Your insurance company wants to insure you while you’re young and healthy. That leaves them years, decades, to collect insurance premiums before they’re likely to have to pay out benefits. If you’re old or sick, you may not be insurable. So insure while you’re young and healthy. Preferably in your 50’s. The average age at purchase is 65.

What about saving up for long term care?
There’s no free lunch. On average, long term care insurance will cost you significantly more than the benefits you are likely to receive. If you insure in your 50’s with a long waiting period, the annual premiums are likely to run about ten days worth of benefits. If you live for thirty years before checking into a nursing home, you’ve already paid in almost a year’s worth of benefits, far more than you’re likely to receive.
If you’re lucky and healthy, you can self-insure: don’t buy the insurance; save and invest the money that would have gone for long-term care insurance premiums. On average, you’ll come out ahead. But there’s a risk you won’t be average. If you’re disabled when you’re young or live longer than you expect to in a nursing home you may exhaust your self-insurance savings. All your wealth is on the line then for long term care, and after that you need to rely on Medicaid.

Should you buy long term care insurance?
If you’re very rich and plan to stay that way, you’re self-insured. Don’t bother.
If you have average income and wealth, Medicaid has you covered. There are probably better uses for your money. You probably shouldn’t bother.
If you’re moderately wealthy, you and your family are at risk. Look into long term care insurance. It may be expensive; but it may be cheap for peace of mind.

(c) Copyright R. M. Starr 2006

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