Sunday, September 9, 2012

Long Term Care Insurance

Insurance companies often quote scary statistics like “Nearly two-thirds of Americans over the age of 65 will require long-term care” and “Long-term care can cost over $75,000 a year.” Both statements may be technically correct, but they distort the reality.

Consider the full set of statistics, as reported in a paper entitled “Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect?” by Peter Kemper, Harriet L. Komisar And Lisa Alecxih, for example, and a more complex picture appears. According to this paper published in 2005:

  • 43 percent of people turning age 65 will have no private out-of-pocket costs for long-term care, at all
  • 19 percent will have costs less than $10,000
  • 8 percent will have out-of-pocket costs between $10,000 and $25,000 over their lifetime.
  • 14 percent will have costs from $25,000 to $100,000.
  • 11 percent will have costs over their lifetime from $100,000 to $250,000.
  • Only 5 percent will have costs of $250,000 or more.

While nearly two-thirds of retirees will, in fact, require Long Term Care (LTC), some of this care will be provided less expensively at home and not all stays will be catastrophically long. The average stay will be three years, with one year at home and two in an LTC facility.

These estimates tell us that most people (61%) will be able to afford to pay for long-term care services out of pocket with no more than modest hardship.

Still, 5 percent of Americans turning age 65 will need to pay potentially catastrophic long-term care costs of $250,000 to $600,000 or more. A complete retirement plan has to consider the possibility that we will fall into that unfortunate 5 percent.

If you have $1M or more in retirement savings ($2M for a couple), you may want to consider self-insuring instead of purchasing LTC insurance. If you cannot afford LTC premiums, you will have no choice but to go the Medicaid route. If you fall in between those ranges of savings, the choice will be more difficult.

Typically, a low-probability risk of a potentially catastrophic loss is a prescription for insurance, and long-term care insurance is available. Nearly all LTC insurance, however, is found lacking in several respects and the decision to purchase that insurance is not always obvious.


  1. You posted this a year and a half ago and I am finally reading it - because I linked back from a current piece. I believe that LTC Insurance can be an effective strategy for many to protect their assets. And many people are very sensitive to cost of care issues if they have dealt with this for their parents or someone else. I encourage many of my clients to explore LTC, I want them to make a decision that is in their best interest, and understand how it works and also suggest that if they are going to buy a policy that they look for one in which they can do some cost sharing. BTW, I do not sell these policies nor do I accept referral fees from any firm.

    BUT!! It is absurd how firms and agents use the 2/3 figure as a meaningful statistic in suggesting the importance of a Long Term Care policy to protect assets. It completely misleads the consumer and, in my view, totally discredits the firm or agent representing the policy. It is appalling and bogus.

    Another tactic that firms use is having their clients' sign the letter that says "Hey, if you end up needing care and are wiped out financially, it is not our fault. We tried to sell you a policy but you were cheap and stupid and didn't buy it, so we are not responsible." One of the letters I received a copy of actually states that it can be used as a marketing tool right in the letter!

    1. Joe Tomlinson, the retirement expert I trust most on insurance issues, has suggested that purchasing the insurance is for many households probably the lesser of two evils. I think your approach is a good one, Mark. For households that can afford premiums and can't self-insure, they need to explore the option and make a very tough decision.

      Thanks for contributing to the discussion.

  2. Thanks, Mark. I agree. If clients clearly understand the risks of LTC needs and the risks of the insurance policies, and can afford it, I'm sure it would bring a lot of comfort to many. Fear-inducing sales tactics I cannot abide.