Long Term Care – Insurance – Part IV
Our final posting on risk management will deal with an insurance product that is one of the most under-appreciated policies available. It is also one of the newest. Long term care insurance does not date back hundreds of years like life insurance and annuities. Rather, it is an outgrowth of the extended life expectancies that improved nutrition and health care have provided for us in the past seventy-five years. The first long term care insurance policies started to appear in the late 1970’s but initial acceptance of the concept was slow, and the idea didn’t gain much traction until the late 1980’s and early 1990’s. The insurers offering this product have encountered some missteps and the policies offered in 2020 have certainly evolved over time.
But what is long term care insurance and does everyone need it? About half of 65 year-old Americans will develop a disability and require some sort of long term care services according to the Urban Institute and the U.S. Department of Health and Human Services. Most will need services for less than two years, but about 14% will require care for more than five years.1 A common misconception is that Medicare covers these needs but this is only true in some very limited circumstances and for some relatively short periods of time, usually associated with a prior hospital stay. Medicare never provides custodial care, which includes supervision and assistance with the activities of daily living. Medicaid will step in, but only after one has virtually exhausted all personal savings. In addition, finding facilities and providers who will accept Medicaid patients can be a trying experience.
Many people associate long term care services with nursing homes, but this is yet another misconception. Most long-term care insurance policies reimburse for care given at home, adult day care centers, assisted living facilities as well as in traditional nursing homes. When all of these possible venues are considered, the reality is that most long-term care services are provided outside of a true nursing home environment.
It’s been said that everyone needs a plan for long term care, but many people fail to make a conscious decision. In reality, the need for long term care is simply one of the risks we face in life and the choices are similar to other risks. Wealthy households can choose to self-insure as they have accumulated adequate resources to pay out of pocket for expected long-term care costs. About 10-12% of Americans elect to transfer the risk to an insurance company (or, at least a portion of it) by purchasing a long-term care policy. Forbes2 reports that this percentage has remained in this narrow range for years. Unfortunately, the majority of Americans are simply ignoring their risk and hoping for the best. However, the statistical evidence suggests that many will be relying on family and friends which is far from optimal and introduces enormous household stress in the process.
The premiums for long term care insurance are an issue for some people and a recent National Association of Insurance Commissioners publication3 notes that experts in the field suggest that premiums are unaffordable if they exceed five percent of income. Another frequent objection is the “use-it-or-lose-it” nature of traditional Long Term Care policies. Insurers have made an effort in recent years to address this last concern by introducing hybrid life insurance policies. These hybrid policies combine permanent life insurance with long-term care riders within the same policy. While many in the industry will acknowledge that these multi-purpose policies can be less cost effective than pure long term care insurance, they highlight the fact that hybrid policies will provide a death benefit to the heirs, even if the insured party never requires long term care. As an old insurance adage states, “The best insurance policy is the one that is in force when it is needed.”
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240.
2Forbes, Aug. 18, 2016, “Who Owns Long Term Care Insurance”.
3National Association of Insurance Commissioners, October 5, 2020; update to NAIC key initiative on Long Term Care Insurance.