Sunday, December 22, 2013

Long Term Care Insurance

Recently, we've had events that made me really glad that I bought long term care insurance for my parents a decade ago. While it's stressful to have any kind of health event at an advanced age, eliminating the financial worries that go with it is a relief no matter what.

This event caused me to look into long term care again, and the landscape is dramatically different from when I first purchased it more than a decade ago. Statistically, 60% of couples who reach age 65 together will need long term care for at least one of them. This makes the actuarial case for long term care insurance grim. When I first shopped for long term care, it was common to be able to buy unlimited benefits insurance. In other words, the insurance would keep paying for long term care indefinitely for as long as the insured needed it.

I modeled the cost of long term care insurance versus the payout at that time, and discovered that even at a high rate of return, if one of the insured needed long term care for more than a few years, the premiums were more than worth it. In addition to a high daily benefit, I also bought an inflation rider, which bumped up the benefit by 5% a year at a compounded rate. My concession to cost was to buy a high elimination period policy, since the point of insurance is to guard against the worst case scenario of needing long term care for years or even decades.

Well, what happened was that in turns out that those policies I bought were not sound: insurance companies lost money on them. It's not a surprise then, that over the last few years we've had offers from the insurance company to switch us to a limited benefit policy in exchange for a lower premium, and it is also impossible to buy similar long term care insurance today. I tried to get quotes, and the costs are in excess of what you would pay at a luxury senior living facility like Vi of Palo Alto.

Needless to say, long term care no longer makes financial sense for most couples: if you are poor, you'll depend on Medi-Cal if you live in California. If you're wealthy enough to cover the costs of say, Vi of San Diego, you might as well self-insure, since the cost of long term care insurance exceeds the cost of even the highest end nursing facility. There's only a narrow range of net-worth and health outcomes where the limited term long term care insurance benefits might make a difference as to whether your heirs get something out of your estate.

In any case, I suspect that given the numbers I'm seeing, it's unlikely that long term care insurance is worth the hassle. And if you have one of the unlimited term benefit policies that have a reasonable premium, you should do everything you can to keep it.

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