The Advisor's View of Long-Term Care Planning

Is buying LTC insurance a "rational" economic decision?

Posted by LTCI Partners | Jan 21, 2014 4:02:00 PM

Recently, a PBS news hour had economist Lew Mandell, who discussed long-term care insurance. The full article can be found on the site and is entitled "Insurance for Old Age? An Economist Explains the Dangers of Long-Term Care Insurance" .

Besides the attention grabbing article headline (the most dangerous things about LTC policies might be paper cuts), the article described how a rational economist might look at LTC Insurance and conclude it is not a good deal.

Unfortunately, people don't purchase products for purely rational reasons. For example, people buy luxury cars that don't make rational economic sense, but provide a benefit to the buyer. A long-term care insurance purchase can provide a lot of benefits for people beyond purely financial. Let's look at some of the Economist's problems with LTC Insurance and discuss some reasons he may be off track.

1) Economist remark: "The combination of rising costs and increasingly inadequate benefits should cause all of us to rethink the value of long-term care insurance".

It's true that LTC Insurance is more expensive than what it was in past due to the sustained low interest rate environment. Because of that very reason, it's true that older policies will probably have more premium increases than newer polices. Since the benefit triggers and benefits are pretty much the same for policies sold since 2000 (pool of money, comprehensive coverage) over a long period of time the overall premiums paid should be similar.

2) Economist: "Over the past two years, the average cost for a private room in a U.S. nursing home has increased 4.8% annually" -implying that a new buyer needs a 5% compound inflation benefit

True, yet home care costs have increased much less over the last five years - about 1%. One reason nursing home costs have increased is due to price shifting - low Medicaid reimbursements being offset by higher charges on private pay residents. People want LTC provided at home, and prospective buyers should look planning for that type of care.

3) Economist: "Once your assets are exhausted, you are generally moved into Medicaid, so the only reason to protect assets is to leave an inheritance".

Medicaid is an important benefit that helps the needy and should be supported by both the federal and state governments. However, there are several limitations with Medicaid - most importantly a lack of control. LTC Insurance my not guarantee you won't go on Medicaid, but it will give meaningful time to have control over care.

4) Economist: "At the upper end, if non-home assets are above about $700,000, a couple can self-fund most nursing home stays without depleting assets"

This argument ignores the incredible emotional strain while those assets are being depleted, because most people don't have any type of plan for when LTC strikes. People insure boats and vacation homes even though that is an irrational decision. LTC Insurance creates an substantial pool of money seemingly out of thin air when times are bad - and can be the greatest gift to a family.

5) Economist: Bottom line, if you have long-term care insurance, look hard at its limitations and your own financial situation before you decide to continue to paying its premiums (particularly if rates increase)

Luckily, most policyholders who have paid for many years don't drop coverage because carriers give them the option to modify coverage. However, let's assume someone never uses their policy. A "rational economist" would say that was a waste of money. Someone not as rational would realize that those premium dollars didn't disappear - they were able to help someone else's family and friends at a time of crisis.

Not rational, but a great feeling!

Topics: Advice articles about planning

Written by LTCI Partners

Leave a Comment