Is long-term care insurance still a going concern?

Heavenly Bow of StarsPhoto courtesy of Tom Davidson

Medical costs are scary. Medical needs definitely count as emergencies, but the costs can be incredible. I always recommend a savings of at least six months of bills and expenses in your emergency fund (here’s what that means for you), but that can get eaten up in a pinch by medical costs, especially if you’re un- or under-insured.

And it’s not like we can reasonably expect to build up (say) a $250,000 emergency fund. That’s like taking out a mortgage just to survive.

So you can see why long-term care insurance feels like an attractive option.

What is long term care insurance?

Long term care insurance (LTCI) is a policy that covers the cost of things like nursing home care or assisted living facilities. Like other forms of insurance, you pay a premium against the day when you need to collect on the service. Should you need to be put in a nursing home, the costs can be punishing. LTCI can offset that.

Without this type of product, your retirement savings can easily be wiped out in a few years. Even if you’re a millionaire, with $100,000 in yearly costs (not inconceivable), you’re going to be broke pretty quickly.

Luckily, the U.S. has Medicaid (at least for now), which is insurance that covers the poor, and it can include some form of LTCI. But you win’t be eligible until you’ve drained all of your other assets. (And before you go hiding your assets in other people’s names, remember that fraud isn’t very nice.)

The idea of LTCI is that you apply for it before you need it. This makes sense, in the same way that you can’t buy AAA membership when you’re broke down on the side of the road; by the time you need it, you’re ineligible.

I believe that long term care insurance is a good deal, and is important for people to get if they can. Assuming it works as intended, it could save you hundreds of thousands of dollars over the long run.

The problem is that I’m not convinced that the program is solvent.

Long-term care [insolvency]?

It’s not hard to see the problems with LTCI. First of all, unless the proverbial piano falls on us, there is a strong likelihood of needing some kind of long-term care as we age. If you want some numbers, almost 70% of people that reach age 65 will need long-term care at some point in their lives.

Not all of us, of course. Sometimes we run marathons in our 80s. But again, the important term is likelihood.

And once you need the care, you need it for life. And that can be a long time.

Now, granted, premiums are not fixed (unlike term life insurance) so one could rise to match the other. But I don’t see us paying in to the system nearly enough to be able to in aggregate cover the care paid out. The costs are too high.

In short, even with sky-high premiums, it still feels like we win out.

And unfortunately, that’s never a good thing for the viability of the market.

Long-term [collapse]

But then again, we have actuarial wonks who do this for a living, right? They’ve figured out the market and priced it accordingly?

Well maybe not. According to a recent article in the New York Times, a “good-size American insurer” of long-term care policies is going into liquidation. And while there is a state-run guarantee fund, it’s almost certainly less than what people had been promised.

I don’t know about you, but I find this chilling. That an insurer can just—poof!—go away. It reminds of of the Great Depression when banks went bust, prior to the New Deal advent of FDIC and other guarantors. Didn’t we fix this?

But then again, I can’t say I’m surprised. LTCI, from all that I’ve researched, seems like either too good of a deal (if premiums stay low), or else isn’t worth getting in the first place (if premiums get too high). There doesn’t seem to be much in the way of a stable solution here.

(The company in question claims that they were stymied by laws around premium changes, though that reads like a little bit of an excuse.)

Is LTCI worth it?

So is long-term care insurance still a good idea to have in your portfolio?

For me, I give the answer a qualified yes, assuming that you purchase a policy as soon as possible (certainly at age 60 or before). But even still, I don’t really trust the system as it stands in place right now.

But given the staggering costs of later-in-life care, what other choice do we have?

But enough about me. How do you feel about long term care insurance?

And have you read my disclosure policy recently?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on April 10, 2017