Is Long-Term Care Insurance Worth It?
By Michael Sams
Quite some time ago, my grandfather bought a long-term care insurance policy. The benefit was $80 per day, and I think that’s the maximum amount you could even buy at the time.
A lot has changed since then.
Today, the average cost of a single day in a nursing home is $225 – and that’s if you want to share a room with someone else. If you want a private room, the average cost goes up to $253 per day (LongTermCare.gov).
I don’t know many people who are willing and able to spend that kind of money on care. If we do some basic math here, that’s $7,698 per month, $92,376 per year, and $277,128 for 3 years of care.
And 3 years is the average amount of time a person will spend in a nursing home (American Association for Long-Term Care Insurance).
While these costs are nauseating, they’re very real. And they’re only going to go up due to inflation and the rising costs of healthcare.
So, is getting long-term care insurance to protect you and your assets from those costs worth it?
The Probability of Going Into a Nursing Home
If $277,128 is a realistic estimate of what you’d pay for an average nursing home stay TODAY, the real question is… how likely am I to go into a nursing home?
Overall, there is a 68% chance that a senior over the age of 65 will need some kind of long-term care due to a physical disability, a vision or hearing impairment, or a cognitive condition (AARP: A Report to the Nation on Independent Living and Disability).
For you, that statistic might not be super helpful. You’re either part of the 68% who will need care, or you’re part of the 32% who won’t.
While it’s more likely that you’ll go into a nursing home or simply need some extra help at some point, there’s still a chance you won’t need it.
At this point, it can be worthwhile to look at some risk factors.
- Did your parents ever need extra care?
- Did your parents suffer from any cognitive impairments like dementia or Alzheimer’s?
- Do you have any conditions or illnesses that could eventually lead to future impairments?
- Are you overweight or obese?
- Are you a single woman?
If you answered “yes” to any of these questions, you’re more likely to need care in the future.
One point that’s specifically important here is if you are or could realistically be a single woman that lives alone. If a freak accident happened, like slipping on ice and breaking your leg or hip, who would take care of you?
See, needing long-term care isn’t just the result of dementia or “getting old.” If there’s ever a time when something happens to your body, and you need help doing the regular activities of daily life, you will need to bring in a helper.
And that’s expensive.
Finally, you can look at the probability of how long you’ll be in a nursing home based on your gender and marital status (American Association for Long-Term Care Insurance).
Again, these are simply statistics from past individuals, and they may not have anything to do with your future, but they at least shed a bit of insight into the general pattern.
Female2.6 yearsMale2.3 yearsMarried1.6 yearsSingle/Never Married3.8 yearsWidowed2.3 yearsDivorced/Separated2.7 years
Single and never married individuals tend to spend significantly more time in a nursing home than those who are married. Keep in mind that your marital status can change in an instant, as is the way of life.
If you’re more likely to spend more time in a nursing home, you’re less likely to be able to absorb the costs, which increases your need for an insurance solution.
How Long-Term Care Costs Change Over Time
You might recall from the beginning of this article that my grandfather bought a long-term care insurance policy when care was only $80 per day.
Well, 20 years later, he ended up in the nursing home, and the costs had actually increased to over $150 per day. Today, they’ve topped $250 per day.
Long-term care costs have doubled over the last 20 years. If we’re assuming the same projection for the next 20 years, here’s what the costs would look like for one year in a nursing home.
The costs double from today’s $92,376 to $184,752 in 20 years.
So, if we’re still taking the average amount of time spent in a nursing home, which is 3 years, and we assume that you’ll check into the nursing home in 20 years, you can expect to pay a total of $554,256.
This might be a bit conservative, because many individuals start looking at long-term care around age 65, and most people start needing care around age 85. However, long-term care policies are often times not available once you hit your 60s – insurance companies prefer approving individuals in their 50s. That means that the eventual cost could potentially be even higher.
Keep in mind that this is just an average – you could spend more time in the nursing home, but you could only spend a couple months there.
Also, the nursing home isn’t the only option when you need care. Home care is becoming more and more popular, because you don’t have to leave your life behind. In general, staying at home is more comfortable – it’s familiar, your things are all there, and you don’t have to go through this major life adjustment.
In this situation, you pay for a skilled nurse to come into your home to care for you. They help you with regular activities, like bathing, dressing, eating, and so on. They’ll also help with taking your medications if you have any, and other tasks that you can’t do on your own.
The cost for home care averages at $20.50 per hour, and if you have someone taking care of you around the clock (24 hours per day), your daily cost would be $492 per day. If you have someone coming in only part-time (12 hours per day), your daily cost would be $246 per day.
That is very similar to the costs of a private room in a nursing home, though the projection is uncertain as hourly wages aren’t as predictable over time.
The Importance of Inflation Protection
The previous examples show that the cost of care rises.
Not only due to inflation, but due to the rising cost of healthcare in general.
When my grandfather bought that long-term care insurance policy with an $80 per day benefit, he didn’t add on inflation protection. When he ended up in the nursing home, and the cost was actually $150 per day, he still had to foot half the bill.
The whole point of buying a long-term care insurance policy is to protect your future, and inflation is simply a reality of the future.
A lot of articles on the internet actually criticize inflation protection, claiming that the inflation option isn’t enough. However, they fail to recognize compound inflation, which keeps up with the costs of both inflation and the rising costs of care.
This ensures that if you buy the policy today, you’re covered for tomorrow’s prices.
The “3 Wealth Brackets” – Do You Need Long-Term Care Insurance?
Another common theme on different websites is that there are 3 wealth brackets:
- People with assets under $300,000
- People with assets between $300,000-$2 million
- People with assets over $2 million
The advice given by financial experts such as The SCAN Foundation Chief Executive Dr. Bruce Chernof or Darin Shebesta, Vice President at Jackson/Roskelley Wealth Advisors is that each group should treat long-term care insurance differently.
They say the first group with the lowest amount of assets should rely on Medicaid. This means that they have to spend down their assets (sell their home, sell their car, deplete their savings, and more) until they have no money, and then the government will step in and pay for their care.
The wealthiest group – those with assets over $2 million – should self-insure by using their own assets to cover the potential costs.
The middle group, dubbed as “The Big Middle,” is the group of people who should look into some type of insurance.
However, this approach is less than ideal from many different angles. I’d like to briefly look at the poorer group and the wealthier group to explain why long-term care insurance is equally as important.
Long-Term Care Insurance for Poorer Individuals
According to the common advice given by financial experts, if you have less than $300,000, you should skip any planning and just rely on Medicaid when the time comes.
However, there are several issues with this.
The first is that you don’t get to choose your quality of care when the government steps in to pay.
Trust us when we say you won’t exactly be staying at a top-notch facility. You have no choice as to where you’ll receive care, and if you’re accustomed to a certain style of living, this can be a terrible way to spend the latter part of your life.
Secondly, $300,000 in assets is still a good chunk of wealth that you’ve built up. The purpose of long-term care insurance is to protect the money you’ve worked so hard for so that you can pass it on to your loved ones.
I hate to do this, but if I HAD to put a number on it, I’d say that if your assets were less than $100,000, I’d probably rely on Medicaid.
There are a lot of reasons behind this. When my grandpa went into the nursing home, my grandma stayed at home. The spousal impoverishment act of 1988 allowed my grandma to keep a certain amount of money every month to maintain her standard of living.
The person in the nursing home can go on Medicaid and the state will start paying for them, but the spouse doesn’t have to sell the home and all of the assets – they get to keep a certain portion of that because of spousal impoverishment.
As of 2018, the maximum resource standard is $123,600, which is why I’d probably rely on Medicaid to pay for long-term care if your assets were around that $100,000 mark. As long as you have a spouse, you might be able to keep those assets.
If you’re single, you have to sell everything, and then you run into situations where you no longer have a home you can pass on to your kids, or you don’t have a vehicle you can give to your grandson.
It’s those kinds of things that make you realize how important your assets are.
Long-Term Care Insurance for Wealthier Individuals
If you’re over that $2 million mark, you have more incentive than anyone to purchase a long-term care insurance policy. You have more assets to protect, and you’re more likely to be able to afford a fantastic policy with great benefits.
Using our example from earlier, 3 years in a nursing home 20 years from now is projected to cost over half a million dollars – that’s still a huge portion of money, even for a millionaire.
You want your kids to get that money, not a nursing home.
In sum, long-term care insurance protects your lifestyle, your assets, and it makes sure the ones you love get that money.
Pros and Cons of Long-Term Care Insurance
Long-term care insurance has a negative reputation because of the rate increases.
The fact of the matter is that the insurance companies aren’t making much (if any) money off of these policies, because people are actually using them. Can you say the same thing for your car or home insurance?
For example, 20 years ago, there were around 100 companies offering long-term care insurance – today, there are less than a dozen, with only a few offering the best options.
The claims are high, and more people needed their benefits than the insurance companies expected, which caused them to hike up the rates over time, leading to unexpected rate increases that were pretty substantial, sometimes even doubling the cost of the policy.
There are other cons, such as difficult underwriting, meaning that if you’re the least bit unhealthy, or even over age 60, you probably won’t be approved. The other major problem is that you can pay into the policy and never actually use it, which is the risk of most types of insurance.
However, there are certain situations where long-term care insurance is still a fantastic option (though there is an alternative insurance solution that we’ll get into next).
1) You’re a small business owner.
If you’re a small business owner, there are major tax benefits to choosing a long-term care insurance policy. If you have a C-corp, you can write off the premiums. The business pays for the insurance, and you get the tax advantages.
2) You do a 10-pay.
If you choose to do a 10-pay, you’re opting to pay for the entire policy over the course of 10 years. This means that you pay for the long-term care premiums, which are higher than normal, but after 10 years, your policy is paid off and you don’t have to worry about future rate increases.
This is also a great idea if you’re a small business owner, because you can pay those premiums in 10 years while you still have your business.
3) You want the inflation protection.
The other popular long-term care insurance solution, which we’ll cover next, doesn’t offer inflation protection. We went over how important compound inflation protection is, because the costs of long-term care are expected to double over the next 20 years.
The inflation protection is an added feature that can make or break the benefits later on, which gives traditional long-term care insurance a huge benefit over other options.
An Alternative to Long-Term Care Insurance – Life Insurance With a Long-Term Care Rider
The extremely popular solution that can protect you from future long-term care costs is a life insurance policy that bundles in a long-term care insurance protection.
This is called life insurance with a long-term care rider.
The major benefit of this option is that you pay into it knowing you’ll actually get that money back. Either it will be passed on to your beneficiaries when you pass, or you’ll access that money before you die to pay for long-term care.
It doesn’t have inflation protection, which can be a big bummer, but the fact that you get to kill two birds with one stone can sometimes offset that.
Another benefit is that life insurance does not have rate increases – your premium is reliable, meaning you can plan your retirement without the “unknown” of the long-term care insurance rates.
Should I Buy Long-Term Care Insurance?
So, after all that – is long-term care insurance worth it?
We’ve received letters from a myriad of individuals who said their policy saved their parents from losing their home, that their policy paid out over $100,000 for them, or that they didn’t know what they’d do without it.
Our stance is that it’s always best to prepare for the worst – that’s why we’re in insurance, but to answer the question, it’s up to you if you think you should buy long-term care insurance.
It’s certainly worth it to compare long-term care insurance to the life insurance alternative, and you can reach us for quotes at any time.