Buying Long-Term Care Insurance Can Be a Bad Gamble

This article was written by Timothy L. Takacs, Certified Elder Law Attorney.

Should you buy long-term care insurance?

The cost of nursing home care and in-home care is rising. The average cost of one month in the nursing home in the Nashville area now exceeds $4,000, and in some areas of the country it exceeds $10,000 a month.

Few Americans can pay this kind of money for nursing home care for very long. According to the U. S. Administration on Aging, two-thirds of all nursing home residents are on Medicaid. Fewer than 5 percent of all nursing home bills are paid by long-term care insurance, says the AoA.

Why are so few people buying long-term care insurance? After all, everyone who has had to use their long-term care insurance is happy they bought it. A vigorous advocate for long-term care insurance, Martin K. Bayne, learned at age 45 that he was afflicted with Parkinson's disease. Fortunately for him, he had purchased a long-term care insurance policy four years before his diagnosis. Why shouldn't all of us follow his example?

Bayne put his finger on it, at least in part. In a February 2001 interview, he said, "Most people don't buy LTC insurance at age 40; it's not their fault! Regardless of whether their employer has offered it to them, people in their 40s worry about sending their kids to college and paying their mortgage, among other financial concerns. Who would expect them to start thinking about paying for nursing home care?"

It's not that working people do not buy insurance. They insure their homes and cars; they buy life and health insurance; many even buy disability insurance that pays them if they are unable to work in their chosen occupation.

The federal government is trying to do something about this. Because the taxpayers are paying most of the nursing home bills, the government is looking for ways to encourage people to shift the cost to the insurance industry instead. Under consideration are tax credits to individuals, and subsidies to employers, to purchase individual and group plans. In 2000 Congress passed legislation for federal employees that subsidizes group long-term care insurance plans similar to their current federal health insurance benefit.

Should you buy long-term care insurance? How can you get an unbiased, informed opinion on what you should do?

Look Out for Biased Reporting!

You will find no lack of information on the Web about long-term care insurance. A lot of this comes from folks who have a vested interest in wanting you to buy a policy. The American Health Care Association, for one, featured an article "Debunking the Myths: Long Term Care Insurance" on its website.  The information was accurate and even authoritative, but that doesn't mean you should buy long-term care insurance.

Similarly, the Center for Long-Term Care Financing (http://www.centerltc.com) warns that the long-term care system is in crisis and that the solution is for everyone to plan on paying privately for their long-term care needs, whether at home or in a nursing home. Of course, since most people don't have the money to do this, the CLTCF tells people to buy long-term care insurance.

Why should people buy long-term care insurance if Medicaid will pay the nursing home? The CLTCF says, "Medicaid is a means-tested public assistance program. It is welfare intended as a safety net for the genuinely needy. The program has a dismal reputation for problems of access, quality, reimbursement, discrimination and institutional bias." Is this true? Are nursing homes that accept Medicaid inferior to those who don't?

Consumer Reports found that in order to promote their products, long-term care insurance agents frequently disparaged Medicaid, implying it provides substandard care, even though the magazine found the quality of a nursing home has little to do with who pays the bill.

Long-term-care insurance is not for everyone, says Consumer Reports. The magazine advises against it "for those who qualify for Medicaid or will qualify soon after entering a nursing home. Nor is it for those who can afford to set aside roughly $160,000 for their care and still have enough left over to provide for their spouse. However, for the majority of nonrich, nonpoor Americans . . . long-term-care insurance is an option worth considering."

Phyllis Shelton, of Nashville's LTC Consultants, writes, "I train agents to always financially qualify people [for long-term care insurance] and tell them if Medicaid is an option for them." Long-term care insurance is not for everyone, Shelton says; but it "is middle America's only shot at dignity as they get older."

The United Seniors Health Cooperative cautions that if paying the premiums is going to cause you financial hardship, you should carefully consider your alternatives. They suggest that no more than 7 percent of your annual income go toward the cost of this coverage.

Some smart people who don't work for insurance companies or the government have analyzed the problem of financing long-term care and concluded that long-term care insurance is unlikely to ever make a significant dent in meeting these costs.

Proponents of long-term care insurance point to a long-term care system in shambles. Several major nursing home chains filed bankruptcy in 1999 and 2000, and liability suits against them are driving them out of some states, such as Florida. Clearly, they say, it is the height of irresponsibility for anyone (or their advisers -- see the Center for Long-Term Care Financing) to advocate continuing reliance on the present system of long-term care financing -- that is, Medicaid. Only private money will save this system, they say. By sowing fear, uncertainty, and doubt about the future of the delivery of long-term care services in the United States, many in the insurance industry promotes their product.

Is the long-term care industry really in crisis? Are we all destined to pay privately if we want quality long-term care? The real experts disagree. While not minimizing the problems with the delivery of quality care, Joshua M. Wiener and David G. Stevenson of the Urban Institute assert that "the hard reality is that the current method of Medicaid long-term care financing is quite economical. Payment rates are usually much lower than Medicare and the private sector. Persons receive government help only after depleting most of their assets. Finally, the institutional bias of the delivery system limits services largely to persons with the most severe disabilities who do not have family supports. Within this system it is difficult to obtain large savings." See "State Policy on Long-Term Care for the Elderly," Health Affairs, May/June 1998, http://newfederalism.urban.org/html/haffairs/wiener.pdf.

Key Problems

You should not get the wrong impression from this article. I am not telling you not to buy long-term care insurance. What I am pointing out is why people are not buying long-term care insurance and why Mark Merlis (for one) has concluded that it will never make much of a dent in meeting nursing home costs, not, in any event, as the insurance is currently sold.

Let's start with a premise, that you are free to accept or reject if you like: people are not stupid. Although the number of long-term care policies being sold is rising, there is a reason that not more policies are sold, particularly to folks who can afford it. They sense that the insurance is not worth it.

There are two reasons for this.

The risk of needing long-term care increases with age, unlike almost every other risk we typically insure against.
Most people buy long-term care insurance (and most insurance is sold) to protect assets. The point is to transfer the risk of losing their assets to someone else.
In other words, when considering whether to buy long-term care insurance, people weigh risks against rewards.

People don't buy long-term care insurance in their 40s, or even in their 50s, because they recognize that the risk is so slight that it is not worth worrying about and certainly not insuring against. As people age, they will start thinking about it, but Martin Bayne is right: people in their 40s have other concerns and, frankly, better things to do with their money than to give it to an insurance company.

What about homeowners insurance? Isn't the risk of catastrophic loss slight? Of course it is; but for one, mortgage lenders require homeowners insurance. So that's not a fair comparison. Second, the risk of loss is the same whether the homeowner is 25 or 75 years of age.

People buy life insurance, even though the risk of death increases with age too. However, the risk of not having life insurance is greater at a younger age, when individuals marry, have children, and incur debt. That's why older people usually don't have large amounts of life insurance. And many younger persons buy life insurance that has cash value. So they regard it as an investment as well as a transferring of risk.

The anticipated rewards for purchasing life insurance, homeowners insurance, and other types of insurance are obvious. If you die, life insurance pays your spouse for support for her and your children. Homeowners insurance rebuilds your home. Health insurance pays your doctor and the hospital. Long-term care insurance pays the nursing home. Right? So why aren't more people purchasing it?

Variables

The essential problem with long-term care insurance is that too many variables are unknown. A rational assessment of whether to purchase long-term care insurance requires some knowledge and appreciation of the risk being insured against. Unfortunately, the variables that affect this assessment are too uncertain. These are listed in the table below.

Variables Affecting the Purchase of Long-Term Care Insurance

What We Know
What We Don't Know


Age
Age when needed

Health
Health care system when needed

Assets
Assets when needed

Need (coverage desired)
Coverage when needed

Cost (premium)
Cost of long-term care when it is needed

Long-term care financing system
Long-term care financing system when care is needed

Risk increases with age

Advances in medical science

 

To illustrate, let's assume that Elmer and Irene are thinking about purchasing long-term care insurance. In his family, Elmer, 56, has a history of heart disease. Irene, 54, has a mother who is now 79 and in good health, living independently in her own home. Her father died three years ago of a heart attack. Her mother's sister, however, at 84 has Alzheimer's disease.
Elmer and Irene own their home, valued at $90,000, in a well-maintained suburb. They have $75,000 in savings, including Elmer's 401(k) retirement plan. Elmer has worked for a local manufacturing plant for 27 years and is making $48,000 a year. Irene is not working, but now that their two children are out of the house and supporting themselves, Irene may take a part-time job. Elmer wants to retire at age 62. Should Elmer and Irene buy long-term care insurance?

They will assess what they know and make an effort to weigh risks against rewards, and the cost of insuring against that risk. At this time, Elmer and Irene know their ages, their health and their family's health, their assets, the cost of nursing homes in their area, the cost of the insurance coverage they feel they need (that is, the insurance premium), and the long-term care financing system. They know that Medicare does not pay for long-term care costs, only for skilled care. They know that Medicaid pays for nursing home care, but only after they qualify for it, financially. They also know that the risk of their requiring nursing home care, while it exists now, is slight, but will increase as they age.

Should they pay the insurance company now and on into the future, to transfer the risk of losing their assets to the nursing home later? What are the unknown variables?

They don't know at what age they will be if and when they will need to use the policy. The average age a person begins an extended stay in the nursing home is about 80 years. So, on average, they can expect to pay the insurance company for 25 years before they will need coverage. In 2025, when Elmer and Irene are most likely to need long-term care insurance, what will the other variables be?

No one knows, certainly not Elmer and Irene, and not the experts either. What will the health care system be like? Will there be a cure for Alzheimer's disease and other afflictions that bring about most of the need for expensive long-term care?

Will Elmer and Irene have assets to protect in 2025? Would anyone like to predict how much money in the bank they will have, or whether they will even have any, or whether they will own their house?

What coverage will they need? The face of long-term care is almost certain to change significantly in the next 25 years. What will home care look like? Will there still be nursing homes? Or will long-term care be delivered in ways that we can hardly imagine today?

What will the cost of this care be? Should we look at historic costs of nursing home care and extrapolate 25 years into the future? This is a tactic commonly used by long-term care insurance salespeople. Their figures show that in 25 years, the average annual cost of nursing home care will be $250,000, compared to $50,000 today. Will you have enough money then to pay for your own nursing home care?

But remember the old adage: figures lie and liars figure. We don't know what the long-term care system will look like in 2025, let alone what the cost of such services will be. Twenty-five years ago, assisted-living facilities were almost non-existent. Now they are everywhere. Who knows what the next big thing in long-term care will be!

Moreover, long-term care insurance was virtually non-existent in 1975. Currently, the insurance industry is trying to position this product as a major source of financing long-term care in the future. But what will the long-term care financing system look like in 2025? Will Medicaid still exist? If so, will it be means-tested or, like Medicare, will Medicaid or its successor cover everyone's long-term care costs, regardless of need, assets or income?

Let's compare other types of insurance. Elmer and Irene buy homeowners insurance because they cannot afford to replace their home if it burns down. They know that the risk of loss to their home does not change over time and that the government won't pay to replace their house, so they do not mind paying a small premium today to transfer a large risk to the insurance company.

By contrast, even though at their ages (56 and 54) the long-term care insurance premium is small, the risk of their needing to use the policy is very small too. As time goes by, of course, the risk of needing long-term care will increase. By how much, though, is an unknown variable. If medical science finds a cure for Alzheimer's disease in 2010, Elmer and Irene will have paid too much for their policy. And given the other unknown variables, what is the risk of their needing to use their long-term care insurance? In short, how do Elmer and Irene know their policy will have any value when they need it?

In the face of these unknowns, should Elmer and Irene pay the insurance company for a long-term care policy? If you were advising Elmer and Irene, what would you recommend they do?

Making Sense of It All

As I posited earlier in this article, people are not stupid. Even though individually we can make amazingly stupid decisions, as a group by and large we humans act rationally, and can discern what is in our best economic interests. For most Americans, not buying long-term care insurance makes better sense.

So as I asked at the beginning of this article: should you buy long-term care insurance?