Sunday, January 11, 2015

Long Term Care Insurance? Who Can Afford It?

What happens when you get old and can no longer take care of yourself?

A reader asked me to write a blog entry on Long Term Care Insurance, which I had mentioned before in passing, but never wrote about, explicitly.

I never wrote about it before simply because it really isn't affordable for most middle-class people.  It also is somewhat deceptive in name, as most policies provide only a few years of coverage, not "long-term" care.   The only thing "long term" about long-term care insurance is the premiums you will pay for decades.

As I noted in my Northwestern Life entry, my Life Insurance agent tried to sell me a policy and he was a very good salesman.   The problem was, the policy was $500 per month when I was age 40.  And $500 a month to cover a "what if" scenario, just wasn't in the cards.  $500 a month for anything just wasn't in the cards.

$500 a month, invested from age 40 to age 65, invested at 5%, comes to a whopping $300,680.72 in your 401(k) plan, or basically is enough to pay off your mortgage.   

But the point was moot.  There was no room in my budget for a perpetual car payment, period.  So I took a pass.

Is Long-Term Care Insurance affordable?   Well, the problem is, like any other insurance, if you want good coverage, you are going to have to pay a lot.  The policy my Northwestern Agent was trying to sell me was a good coverage policy - it provided coverage for fairly extended long-term care.

Other policies are a lot cheaper, but of course, they cover a lot less.   For example, this site has a premium calculator that is illustrative.   For a monthly premium of  $241.88, I can get $200 a day coverage with a 5% inflation coverage, for a total of five years.   So if I have a stroke and need a nurse to come and change my adult diaper, they will pay $200 a month for five years.   Anything beyond that, I have to pay for myself.  Many policies are for far less ($100 to $150 per day) for a far shorter period of time (1 or 2 years).   As you can see, the term "long term care" is a misnomer.

And like with life insurance, the monthly premiums are lower if you apply earlier and higher if you apply later.   But the overall cost remains the same, over time.  Insurance companies aren't idiots and they are not giving out free money samples today.  Oh, and by the way, the premiums are not fixed but can increase dramatically over time.

Please note I am not endorsing the site listed above - it is named "The Federal Long Term Insurance Program" and of course, is not affiliated with the government.  It is designed for government employees only, however.  Nevertheless, the calculator is illuminating.

There is not a lot of critical information out there about long-term care insurance.  Most articles seem reluctant to criticize these policies in anything by the most opaque terms.    This fellow, for example, notes that some agents (such as mine) sell this insurance based on fear and he suggests finding a new agent if that happens.   However, the same fellow starts off his article with this scary quote:
"About 2 in 3 people over the age of 65 will need long-term care during their lifetime. Whether it’s assistance in the home or assisted living, many of us will require services that aren’t covered by Medicare and that can quickly add up into the hundreds of thousand of dollars."

Read more here:
OMG 2 or of 3 people over age 65 will need long-term care!  OMG!  OMG!  Oh, wait, someone doesn't understand statistics.    The phrase "People over 65" is a misleading term and should not be compared to, say, "people under 25".   One is a open-ended number and the other closed.   "People under 25" for example, includes people aged 24, 23, 22, 21,.... all the way down to birth.

"People over 65" on the other hand, includes everyone from a just-retired steel worker to the oldest person on the planet at age 117 or so.  Yes, if you live to be 100 years old, you are probably going to need long-term care.   The odds of needing long-term care go up to 1:1 as you approach age 100.

But the idea that 2/3rds of us will need long term care is deceptive.    Most of us will die before that happens.   This is not to say that long-term care is some long-shot "what if?" scenario, but rather not as likely as alarmist statements like the one above imply.

I live on retirement island, and we see people using long-term care.   Momma has a stroke or breaks her hip, and she has a "caregiver" come and stay with her for a few hours a day to attend to meals and the toilet.   It is nice if you can be able to do that.  But bear in mind that what a long-term caregiver provides isn't necessarily the only way to get such care.

You could sell your home and move to a smaller place that is easier to take care of, and use the money to pay for your assistant.  Or you could sell your home and use the money to buy in to an assisted living center.   Both might be better options than staying in a four-bedroom house.

What long-term care insurance does, is allow you to stay in your home for a few more years and possibly protect your assets so you can leave an inheritance to your kids.  You are insuring your house and your possessions, not you.

As noted in the calculator above, many policies only pay $100 to $200 per day, for a year to five years, for long-term care.   So the idea that this will cover chronic care for a decade or even more than a few years, is nonsense.  It just delays the inevitable, which is going into assisted living, which is the inevitable "end game" for anyone who lives long enough.

But wait, it gets worse.    The article cite above talks about long-term care insurance in the most oblique terms.   You really have to read between the lines:
"However, long-term care insurance has turned out to be a problematic product. Even if the premiums are reasonable, all too often beneficiaries discover that insurance carriers are slow to acknowledge or pay claims. In many instances, the fine print creates exclusions or conditions that exasperate people when they eventually seek reimbursement. Many other policyholders have learned the hard way that premiums can rise dramatically. What began as a reasonably priced policy can become expensive, especially for retirees on a fixed income"

Read more here:
In other words, this is a total rip-off.   Why do I say this?  Well, if premiums rise over time (and they will, trust me) then there will reach a point where you cannot afford to pay the premiums and you will end up dropping coverage right before you actually need the benefits.   If you pay in from age 40 to age 65, and then decide that on your fixed income you can't afford it, you've basically tossed away an awful lot of money that could have made your retirement a lot more comfortable - and would have paid for some long-term care.

The insurance company, on the other hand, collected a lot of premiums from you and never had to pay out.  Sweet deal for them.   It sort of reminds me of these poker games, where someone with all the money can just keep raising the ante until everyone else drops out.   They've filled the pot at the center of the table with your money and then force you to "fold" when the game becomes "too rich".    Playing poker is a bad idea.   So is long-term care insurance.

The second aspect of this quote is more disturbing and is the central problem with extended warranties.   Companies put in a lot of "fine print" into contracts like this, and while the salesmen tell you that they "cover everything" such verbal promises are unenforceable.  So you pay top dollar for a contract like this (and the salesman gets a huge commission) and you end up with little or no coverage and wish instead you had the money you spent.

The bottom line is this:  Most of us will end up on medicaid if we get older and have to go into assisted living.   We will burn through our assets first, and then when those are gone, medicaid will kick in.   Sure, you can play games with deeding houses to your children or whatever.   But what you are doing is merely protecting your inheritance not protecting yourself.

Long-term care insurance isn't insurance for you, it is insurance for your money, which your heirs will really appreciate.  If you are really rich, you can "afford" these policies - but then again, you would not need them.   If you are middle-class, you might think you can afford such a policy but it would put a huge dent in your retirement savings and provide very little in real coverage.

My perspective is this:  Put the money you'd put into long-term care insurance into your 401(k), IRA, or toward paying down your debt.   Most Americans are not fully funding their retirement as it is - or retiring in debt.   Spending money on "what if" insurance is a waste of money.   It simply isn't affordable.

And despite the name, it really isn't long-term.