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Sunday, December 22, 2013

Long Term Care Insurance

Recently, we've had events that made me really glad that I bought long term care insurance for my parents a decade ago. While it's stressful to have any kind of health event at an advanced age, eliminating the financial worries that go with it is a relief no matter what.

This event caused me to look into long term care again, and the landscape is dramatically different from when I first purchased it more than a decade ago. Statistically, 60% of couples who reach age 65 together will need long term care for at least one of them. This makes the actuarial case for long term care insurance grim. When I first shopped for long term care, it was common to be able to buy unlimited benefits insurance. In other words, the insurance would keep paying for long term care indefinitely for as long as the insured needed it.

I modeled the cost of long term care insurance versus the payout at that time, and discovered that even at a high rate of return, if one of the insured needed long term care for more than a few years, the premiums were more than worth it. In addition to a high daily benefit, I also bought an inflation rider, which bumped up the benefit by 5% a year at a compounded rate. My concession to cost was to buy a high elimination period policy, since the point of insurance is to guard against the worst case scenario of needing long term care for years or even decades.

Well, what happened was that in turns out that those policies I bought were not sound: insurance companies lost money on them. It's not a surprise then, that over the last few years we've had offers from the insurance company to switch us to a limited benefit policy in exchange for a lower premium, and it is also impossible to buy similar long term care insurance today. I tried to get quotes, and the costs are in excess of what you would pay at a luxury senior living facility like Vi of Palo Alto.

Needless to say, long term care no longer makes financial sense for most couples: if you are poor, you'll depend on Medi-Cal if you live in California. If you're wealthy enough to cover the costs of say, Vi of San Diego, you might as well self-insure, since the cost of long term care insurance exceeds the cost of even the highest end nursing facility. There's only a narrow range of net-worth and health outcomes where the limited term long term care insurance benefits might make a difference as to whether your heirs get something out of your estate.

In any case, I suspect that given the numbers I'm seeing, it's unlikely that long term care insurance is worth the hassle. And if you have one of the unlimited term benefit policies that have a reasonable premium, you should do everything you can to keep it.


Chuck Karish said...

My friend the health care futurist said that insurance for long-term care was considered for inclusion in the ACA but "it didn't pencil out".

Peter said...

If you do have an unlimited term benefit policy, what are the odds that the company will still be solvent 20+ years from now when you need it, or won't weasel out of its obligations somehow? Is there a separate pool to backstop the insurance companies, or any kind of regulation to ensure that they would honor the policy?

(This is why I decided that such a policy was no use for myself ... and my parents live in Canada, where the government takes care of things if they run out of money ... in effect the government runs the insurance pool, which makes a lot more sense to me.)

Piaw Na said...

Actually, the company we bought it from is still solvent, just no longer offering the policy to new customers.

And yes, there's a separate pool to backstop the companies.

I agree. The socialist Canadians do this right. The Americans are just too stupid to do the right thing.

Peter said...

"Socialist Canadians"? The federal government has been Conservative (with the Prime Minister from the Canadian equivalent of Texas) for 8 years and the provincial government where my parents live has been Liberal (middle of the road) for 13 years. On the other hand, the Canada Pension Plan and Old Age Supplement payouts are considerably less than Social Security in the US.

(Or are you being ironic with "socialist"?)

Xiaoqin said...

I would like to see how much you really put in and how much you get out of it at the end. I am still suspicious about the benefit without seeing real numbers :P

Piaw Na said...

Yes, I was being ironic/sarcastic when I referred to the Canadians as socialist. Basically, the Americans are far to the right of all other sensible developed countries.

Unknown said...

What I've seen of long term care insurance is that the benefits do not come close to covering even the least expensive nursing home. When my grandmother needed to go into long term care her estate was essentially handed over to the state and she had to go on medicaid. What would have really been useful is an insurance plan that paid her family a benefit that is sufficient to purchase the estate back so that house and any valuables could be kept in the family, more like a life insurance policy, but payable upon entering long-term care. This would also be less risky for insurance companies as they would know the pay-off value up front and could price the plan accordingly.

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