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Who Should Buy Long-Term Care Insurance?

Last week a few readers wrote in asking about long-term care (whether to purchase policies in the first place, or whether to keep existing policies when premiums rise sharply).

Unfortunately, the question of long-term care insurance is one for which I don’t have a very good answer. Long-term care poses a significant financial risk for most people. Yet there are a few good reasons why a person might be better off opting not to buy a long-term care policy.

You Can’t Afford the Premiums

If you can’t afford to pay the premiums, you’re in an unfortunate situation, but the decision is easy.

Coverage via Medicaid

In addition, many people are in a position such that Medicaid would kick in relatively quickly in the event of a long-term care need. For those people, buying LTC insurance usually doesn’t make sense because the policy would mostly be protecting the government rather than protecting the insured person.

In fact, a 2014 study from the Center for Retirement Research at Boston College found that, largely because of the protection offered by Medicaid, only 22% of single 65 year old men and 34% of single 65 year old women could expect an improvement in overall economic outcome by purchasing LTC insurance. (You can find the study here or a summary paper here.)

Of note, that study only looks at single individuals rather than married couples. Presumably, married couples would have a higher willingness to pay for LTC insurance because of worries that one spouse’s uninsured LTC needs could leave the other spouse with a lower standard of living than desired. (Medicaid does have rules for preventing spousal impoverishment, but the limits are low enough that in many cases the healthy spouse would still be left in an undesirable situation.)

You Can Pay Out of Pocket for Long-Term Care

As with any insurance, you will on average lose money by purchasing long-term care insurance. That is, because a part of the premium goes to pay for the insurance company’s overhead and profit margin rather than to pay benefits for policy owners, policy owners will on average have a negative outcome.

To be clear, this is not in itself a reason not to buy long-term care insurance. The same thing can be said (i.e., that you will, on average, lose money) about purchasing term life insurance, health insurance, disability insurance, and auto insurance, yet they’re all considered to be wise purchases in many/most cases.

Rather, the point here is that, because insurance is on average a losing proposition, it generally only makes sense to insure against a cost that you cannot reasonably pay out of pocket.

As far as whether or not it’s possible to pay out of pocket for a long-term care cost, it’s helpful to remember that long-term care cost isn’t purely in addition to current living expenses, as the cost of such facilities typically includes some things that are currently a part of your normal budget — meals, for instance. Plus, other expenses (e.g., travel and possibly housing) naturally disappear or nearly disappear when a person enters a long-term care facility.

According to a 2016 report from the National Association of Insurance Commissioners (with credit to Christine Benz’s excellent “75 Must-Know Statistics About Long-Term Care” for directing me to the report), for people turning age 65 in 2015-2019:

  • 48% are expected to have no long-term care costs during their lifetimes,
  • 15.4% will have costs of up to $50,000,
  • 9.7% will have costs of $50,000-$100,000,
  • 11.7% will have costs of $100,000-$250,000, and
  • 15.2% will have costs that exceed $250,000.

Another noteworthy point: people with lower incomes are more likely to have an extended need for long-term care. (See Table 5 on page 35 of the NAIC report.) This isn’t surprising, since people with lower incomes are often in worse health than people with higher incomes. But it certainly makes planning even more challenging for lower-income people.

Policies are Problematic

The turmoil of the LTC insurance market (i.e., premiums increasing significantly and unpredictably and insurers choosing to leave the business entirely) is another reason that would make me leery of buying LTC insurance if I felt that I did not have a need for it.

Even if you had perfect information about the probability of needing long-term care at each year in your life and perfect information about the expected cost of that care, it would still be a challenge to determine whether a policy is a good deal or not, because we don’t have a good way to predict how much most policies will cost over an extended period.

recent paper from John Ameriks of Vanguard together with four other researchers concluded that, “better quality LTCI would be far more widely held than are products in the market, be held in large quantities, and generate substantial consumer surplus.” In other words, there are plenty of people out there who want long-term care insurance and who would be willing to pay for an ideal version of it, but who do not actually own a policy because of undesirable characteristics of the products available today.

So Who’s Left?

So, after considering all of the above points, who does that leave as the people who should be buying policies? People who meet all of the following requirements:

  • You can afford a policy.
  • You could not easily pay out of pocket for long-term care.
  • The protection from Medicaid is not acceptable/sufficient protection for one reason or another (e.g., because you have sufficient assets that Medicaid wouldn’t kick in for far too long).
  • The undesirable characteristics of currently available policies are not sufficient to deter you.

While that’s a list of requirements, it still leaves quite a lot of people.

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