Long-Term Care Insurance: The Risks and Benefits

Republished with Permission © 2009 Nolo.

Insurance companies advertise long-term care insurance as a necessary protection against the high cost of care, but is it really a good investment?

Over the past decade, people have become increasingly aware of how easily long-term care can wipe out a lifetime's savings -- and insurance companies have been quick to capitalize on that fear. Long-term care insurance, also known as nursing home insurance, has been widely advertised as protection against the costs of long-term care, particularly residential nursing facilities. However, this kind of insurance is expensive, and it often provides only limited benefits -- with many restrictions and conditions -- that may end up covering only a small percentage, or nothing at all, of your total long-term care costs.

Insurance companies market long-term care (LTC) insurance by suggesting that consumers are likely to wind up spending years in a nursing facility -- a prospect that would wipe out their savings and perhaps leave them without a roof over their heads. However, the actual odds of a long nursing facility stay are considerably lower than the insurance industry would like you to imagine, and with the protection afforded by Medicaid laws, there is virtually no risk of being thrown out of a nursing facility and into the street.

When you consider the true odds of a long nursing facility stay along with the high cost of LTC insurance and the other things you could do with that premium money, you may find that for you -- as for the 95% of the population over age 65 who have not invested in it -- LTC insurance is not a good bet.

Nonetheless, there are some people -- for example, those who have assets worth $300,000 to $500,000 above and beyond the value of their homes -- for whom LTC insurance may be a sound idea. This is particularly true if LTC insurance is viewed as a safety net rather than as a financial investment -- and if your policy includes coverage for assisted living facilities.

The Odds of a Long Nursing Facility Stay

The real figures about how much time a person is likely to spend in a nursing facility present a rather different picture than the one painted by the insurance industry:

  • Two-thirds of all men, and one-third of all women, age 65 and older will never spend a day in a nursing facility.
  • Most nursing facility stays are brief -- only about 10% of men and 25% of women age 65 and older spend more than a year in a nursing facility.
  • Only 10% of all nursing facility residents will stay longer than three years.
  • More than half of all nursing facility stays last six months or less. The average stay of those who enter a custodial care facility is about 18 to 20 months.

The Performance of Long-Term Care Insurance

The relatively slight chance that an elder will need three or more years of nursing facility care means that insurance companies do not pay out on their policies to nearly the extent that they suggest when they sell the policy. When the policies' conditions, exclusions, and benefit limits are figured in, the performance of these policies has been quite poor -- at least in the decade of the 1990s, for which complete statistics are available:

  • About half of all LTC policies lapsed before any benefits were paid; policy holders were unable or unwilling to continue paying their premiums.
  • Of those people who bought insurance and later entered a nursing facility, about half never collected a dollar from their LTC policies.
  • No benefits were ever paid to the many people who bought nursing facility coverage but instead received home care or entered a residential facility not covered by the insurance.
  • When LTC benefits were paid, they were usually far below the actual cost of care.
  • For many of the longest-term residents, benefits were used up before the nursing facility stay ended.

In all of these situations, LTC insurance failed to live up to its promise to help people avoid using up their savings or relying on Medicaid to pay for long-term care. In other words, it was a lousy investment.

Improvements in LTC Insurance

In response to pressure from consumer groups, embarrassing media exposure, and increased competition from other insurers joining the market, LTC policies have improved somewhat in recent years. These improvements include clearer terms and conditions, which give consumers a better idea what to expect for their money. Many policies now offer extended coverage to include some types of assisted living residences in addition to regular nursing facilities. A number of policies permit elders to use a pool of benefit funds for either home care or residential long-term care, rather than only for one or the other. Requirements to qualify for benefits have also been loosened somewhat, and policies now routinely permit the policy holder to "step down" to lower levels of coverage, for a lower premium, if continuing to pay for the higher benefits becomes too financially burdensome.

Deciding Whether to Buy LTC Insurance

Consumer and financial experts generally agree that LTC insurance is a bad investment unless the monthly premium is 5% or less of your monthly income. When calculating this 5% figure for future years, bear in mind that your premiums are likely to rise, while your income will probably drop.

In general, if, when you reach your 80s, in additon to your home, you expect to have substantial assets -- over $300,000 in assets and over $50,000 per year in income (in today's dollars) -- then a long-term care policy with high benefits and compounded inflation protection might be a reasonable investment.

If you are considering LTC insurance, be a very careful consumer. Comparison shop among several policies, checking each for exclusions and limitations. Don't base your decision solely on advice from an insurance agent or broker who is trying to sell you a policy. Check the latest analysis of LTC policies by Consumer Reports, a consumer information magazine that regularly does comprehensive studies and comparisons of particular policies. You can find Consumer Reports at any local library or online at www.consumerreports.org (you may have to buy a subscription to access certain information).

Remember that you may never need long-term care at all, or you might not need enough care to collect much in the way of insurance benefits. Before you make a final decision, ask an accountant or other financial advisor whether there might be more profitable ways of investing the money you would otherwise put into insurance premiums. Those investments may provide better protection and liquidity for your money than a long-term care insurance policy, and you'll have to spend that money on care only if you need it.