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The Unpredictability of Long-Term Care

Updated: Jul 20, 2023

A lot of seniors disagree when it comes to long-term care insurance. Half will need such care at some point in their lives and yet only a fraction carry insurance to cover the costs.

Medicaid pays for long-term care for lower-income individuals without other means. By contrast, wealthy people with at least $2 million to $3 million in assets usually can afford to pay for care out of their own pockets. The dilemma comes for those in between— those who are neither poor nor wealthy. The potentially staggering costs of long-term care stand to upend their retirement budget or eat through money they hoped to leave to their children.

According to PwC, the average lifetime cost of long-term care is $172,000. Are millions of Americans making a huge mistake by not buying insurance to cover these costs?

I don’t think so. Long-term care insurance isn’t like a lot of other insurance; the premiums are high because insurers know there is a decent chance that the policyholder will use it. Additionally, insurers usually cap what they will pay out.

Instead of buying traditional long-term insurance, most of our clients who want to insure do so by buying other insurance products for long-term care. More often than not, we use some form of life insurance that allows them to accelerate the death benefit if care is needed.

Such policies are attractive to people who want to build a legacy for their heirs in addition to defraying the expenses of a nursing home or in-home nursing care. A life insurance policy with a long-term care rider also can make particular sense for people with health issues because underwriting tends to be more streamlined than for traditional long-term care insurance.

When it first became popular in the late 1980s, long-term care insurance was cheaper and usually more generous than the policies being sold today. It turned out that insurers had underpriced coverage-- they overestimated the percentage of customers who would let their policies lapse before filing claims, and they underestimated how long people would require long-term care services. Insurers were forced to jack up rates, and some exited the market. Most of the long-term care insurance available today has more restricted guarantees.

The fact that insurers failed in such a dramatic way illustrates the real problem with long-term care financial planning, that averages can’t really capture the entire range of outcomes. A quarter of the time, the expected cost of long-term care is less than $26,000, meaning a long-term policy may not even come into play. Five percent of the time, long-term costs top $578,000, exceeding the coverage limits of most policies and leaving the customer on the hook for substantial costs, and one percent of the time, costs exceed $949,000, PwC found.

*Chart courtesy of AARP

As a fiduciary financial advisor, we encourage clients to weigh factors other than cash. For example, do you have home equity you could tap? Do you have nearby children who can be counted on? Do you have a family history of dementia that puts you at higher risk of needing care? What state will you live in when you utilize long-term care services? Answers to all of these questions will help you to determine your need for insurance.

Here at RG, we incorporate those answers into personal financial plans and then utilize our financial planning software to stress-test numerous complex if/then scenarios to quantify the viability of any given course of action. Ultimately, our decision on whether to buy insurance or not is indicated by that stress test. As a function of our particular clientele, I find that we typically recommend self-insuring long-term care expenses, but we always run the numbers. And we frequently find exceptions, no doubt about it.

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