What is long-term care?
Long-term care is custodial care that you might need if you lose cognitive capacity or become severely disabled. It is common for older adults to require such care at some point during their retirement. For example, imagine someone with Alzheimer’s or severe dementia — they will need help with getting dressed in the morning, feeding themselves, going to the bathroom, and many other types of activities day in and day out, often for years.
This type of care might be provided in your own home from a part-time home health aide, in an assisted living facility, or in a nursing home. No matter where it takes place, this care is costly and unfortunately it’s not covered by Medicare or other traditional health insurance plans.
What is long-term care insurance?
Long-term care insurance, as you might have guessed, is an insurance policy you can buy that will help you pay for the costs of long-term care. Long-term care insurance has been around for a long time, but it’s a product that isn’t widely known or talked about. There’s a well-documented gap between the number of people who have long-term care insurance and the number of people who could potentially benefit from it. We believe this gap exists because:
- Many people underestimate their chance of needing long-term care
- Many people underestimate the cost associated with long-term care
- Many people incorrectly believe that health insurance or Medicare will pay for long-term care
- Thinking about a future disability is unpleasant and stressful, so many people continually delay the purchase decision
Additionally, long-term care insurance can be relatively expensive, and so many people delay purchasing long-term care insurance since they don’t want to think about it and it’s painful to find money in the monthly budget for additional premiums.
What impacts the long-term care insurance buying decision?
As with all kinds of insurance, whether or not this product makes sense for you will depend on a number of factors including:
- Your total assets (e.g., your ability to pay for this care out of pocket)
- How much you care about leaving an inheritance to your children
- How much you care about your quality of care in the case that you do need long-term care (is sharing a room in a Medicaid facility okay with you?)
- Your risk tolerance
If you’re Bill Gates and you have plenty of money to pay for your care out of pocket, then you probably don’t need long-term care insurance. Similarly, if you do not care if you become a burden on your family or if you are fine receiving care from a Medicaid facility in a shared room, then you might not find long-term care insurance very valuable.
However, if you’re nervous about outliving your money in the case where you need to pay for long-term care out of your retirement savings and you want to ensure that you’re not a burden on your children or other family members, then long-term care might be for you.
What is insurance even for?
One important thing to remember about all insurance products is that you should never buy an insurance product where you expect to get more back than you put in — any company that offers a product like this is going to go out of business!
We buy insurance to help us mitigate our risk in the case that something especially bad happens; insurance is about reducing downside risk — we give the insurance company some money to help us make sure that if something bad happens, it isn’t catastrophic for us and our families. Think of it this way: if you have fire insurance for your home, you hope that you never have to use it. So even though you’re paying every month for this insurance, the best case scenario for you is that the insurance company keeps your money and you never see any return.
Is long-term care insurance worth it?
Here, we’ll take a look at some example policy benefits and premium payments to see how the economics of long-term care insurance works. For all of the scenarios listed below we’ve used the Genworth long-term care insurance calculator to generate estimated monthly premiums.
All of these scenarios assume a 90-day elimination period and a 4% annual compounded return on investments. For calculating the opportunity cost of the premiums, we assume that premiums are saved with compound returns until age 80.
Scenario 1: 55 Year Old Woman in Maryland, 3 Month Elimination Period, 3 Years of Coverage, $150 Daily Benefit
| Monthly Premium | $148.78 | Value if premiums were invested until age 80 | $74,353.77 | |
| Benefit period | 3 years | Implied years of self-funded coverage | 1.36 | |
| Daily benefit amount | $150 | Total value of insurance | $164,250.00 |
Scenario 2a: 60 Year Old Man in Texas, 3 Month Elimination Period, 5 Years of Coverage, $100 Daily Benefit
| Monthly Premium | $112.08 | Value if premiums were invested until age 80 | $40,049.13 | |
| Benefit period | 5 years | Implied years of self-funded coverage | 1.10 | |
| Daily benefit amount | $100 | Total value of insurance | $182,500.00 |
Scenario 2b: 60 Year Old Man in Texas, 3 Month Elimination Period, 2 Years of Coverage, $250 Daily Benefit
| Monthly Premium | $196.22 | Value if premiums were invested until age 80 | $70,116.06 | |
| Benefit period | 2 years | Implied years of self-funded coverage | 0.77 | |
| Daily benefit amount | $250 | Total value of insurance | $182,500.00 |
Scenario 3: 70 Year Old Woman in Arizona, 3 Month Elimination Period, 3 Years of Coverage, $150 Daily Benefit
| Monthly Premium | $424.88 | Value if premiums were invested until age 80 | $61,214.10 | |
| Benefit period | 3 years | Implied years of self-funded coverage | 1.12 | |
| Daily benefit amount | $150 | Total value of insurance | $164,250.00 |
Discussion
As we can see, the estimated monthly premiums vary widely depending on the age of the insured as well as the benefit amounts for the policy. In all cases, the opportunity of saving and investing the premiums is substantial, however the total value is still substantially less than the coverage that is provided by the insurance.. By saving the premiums, in all of these scenarios, the applicants can only self-insure themselves for between 9 and 15 months of coverage.
So, is long-term care insurance worth it? For many people, the answer is “yes” but it is definitely a decision worth weighing carefully and the right decision for you will depend on both your financial circumstances as well as your preferences for how you want to live in the future.
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