Long-Term Care Insurance Is Confusing and Complex, But is it Worth It?

long term care insurancePreparing for long-term care costs is hard to predict and will be costly to mitigate. Few have prepared for this gathering storm. Private long-term care insurance is available, of course, to help pay for expensive services if you are mentally or physically incapacitated late in life, but it is a notoriously confusing and not always reliable product. That’s why few people turn to such insurance. Some 70 percent of those over age 65 will require some form of long-term care before they die, but only about 20 percent own a policy. I have clients who regularly show me their policies and in many cases it does not do what was expected and getting those benefits, even when entitled, can be a challenge.

The median annual expense for a semiprivate nursing home room is more than $80,000 across the US, according to a national survey by Genworth, an insurance company. That’s 4 percent more than last year, which means that the cost is growing at more than double the rate of overall inflation. In PA, the number is closer to $120,000.00 per year.

Stand-alone long-term care insurance is an imperfect financial hedge to a complex situation. And for many people it doesn’t make sense to pay for a policy that may never deliver its promised benefits. While insurance premiums are lowest when you’re younger, you may not need it for decades, if at all. In the interim, most policy owners face premium increases, which is why many people let the policy lapse, leaving them with no coverage and no compensation for money spent on premiums. And sometimes the insurer who you purchased from no longer is in business or servicing the policy. Premiums on such policies have more than doubled from 2007 to 2014, according to the American Association for Long-Term Care Insurance, a trade association. A 55-year-old couple typically paid a combined $1,982 annually seven years ago for a policy offering $100 a day in benefits and 5 percent annual inflation protection with a 90-day deductible. Today that same policy would have cost around $5,000.

It’s hard to compare policies side by side because of multiple layers of coverage, exclusions and prices based on age and health. And the business has proved difficult for insurers to figure out: Only 14 companies currently sell the policies, compared with nearly 100 a decade ago. When this coverage was created the companies that issued policies had no idea what they were getting into. Compared to other types of insurance, people tended to keep the policies longer and file claims more frequently (and stay on claim using the policy benefits much longer). Plus, many insurance companies, which invest premium dollars in fixed-income investments, have been hurt by low yields in recent years.

For many middle-income Americans retiring with modest assets (under, say, $500-750,000.00 total), long-term care insurance may not be a good use of their money. Premiums for top of the line coverage ($250 a day, 3-5 years of coverage, compound inflation coverage), can be enormously expensive. And the older (and sicker) you get, the more likely you will be rejected for coverage.

Several newer products called hybrids add on long-term care benefits to life insurance and annuities that may address this concern. But they add even more layers of cost and complexity.

For those in such situations, experts advise consulting an elder law attorney who doesn’t make money from recommending the policies. That’s the best way to receive an objective — and nuanced — evaluation on whether this product makes sense for you. They can help you look at your personal situation and determine, given your assets and risk profile, if long term care insurance, hybrid life insurance, regular life insurance or going without insurance is the best option considering your resources and goals.