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No Easy Solutions to the Long-Term-Care Paradox

This is obviously a time of transition for the provision of long-term-care insurance.

Judith A. Hasenauer, 03/03/2011

Have a comment, insight, or burning opinion on this article? Make your feelings known in the comments section at the end of the article.

This, the first year that the "baby boomers" reach age 65 is causing large numbers of people to take a long, hard look at their financial futures. Particular attention is being paid to retirement planning and the frightening specter of the need for long term care that seems almost inevitable for people as they age. Long term care insurance is designed to provide protection against the financial ravages that long term nursing care involves. Unfortunately, the insurance industry has not done as much in this area as might be expected. There has been recent news of at least one major insurer leaving the long term care market and finding long term care insurance is not always easy--at least not at an affordable price.

One of the partners in our firm, an insurance specialist of long standing has stated that the problem with long-term-care insurance is this: if you can afford it you do not need it and if you need it you cannot afford it. This is the paradox of long-term-care insurance in the current market.

If we analyze the reasons for this paradox, they resemble the problems with retirement planning. Without tax and employment incentives, people tend not to provide for retirement until they are faced with the possibility of retirement in the immediate future. Yet, it is axiomatic that retirement planning must start early in a person's career if there is to be enough time to accumulate adequate funds to cover a time period that may be as long as the working career. Likewise, it is difficult for young people to be concerned enough about terminal illness in their old age when they are having a tough enough time surviving the financial concerns of taxes, houses, mortgages and children. As a result, it is almost impossible to convince people to plan for terminal illnesses when current survival is a more important concern. Moreover, the insurance industry has not yet designed products specifically created for the long term care market that will enable people to begin funding for this eventuality over the long haul. Instead, long-term-care products are typically sold to people who are either already at the stage of their lives when they are likely to need long-term care or who are at an age where it will not be long before the need appears.

As people approach the times of their lives when the need for long-term care becomes obvious, it is easy for them to take the approach that someone else will fill the need when it arises: either the government or loved ones. Unfortunately, the cost of long-term care for a terminal illness--particularly when dementia is involved, is appalling. It is usually beyond the capacity of loved ones to handle the expense and the government is notoriously unreliable for providing permanent solutions to social concerns. Nevertheless, the huge numbers of baby boomers continues on the path to old age and the problem of long-term care cannot be swept under the rug.

There is no easy solution to this problem. Any solution, whether it involves purchase of a long term care insurance policy or some other method, requires prior preparation and the commitment of resources if the goal is to be accomplished. If a person is one of those fortunate enough to possess the financial wherewithal to pay for their own long term care needs, they have nothing to worry about. The vast majority of us do not have such financial wherewithal so must either hope the government or loved ones will step up when the need arises or must provide for their own long term care.

There have recently appeared on the market some newly designed products that are intended to provide as easier "cash value" approach to long-term care insurance. This is certainly preferable to the casualty approach that long term care insurance has had for the past twenty or so years. Hopefully, the insurance industry will continue to seek innovative solutions to this problem. The government has helped somewhat by providing tax incentives for long-term care combined with annuities, but the final solution is not yet here.

We mentioned earlier that at least one major insurer has departed the long-term-care market. We are not sure why this has occurred, but we suspect it is because the products that were being sold were mispriced. The statistics necessary to price insurance only exist for the long-term-care market by studying the historic use of long-term-care facilities in our country. Unfortunately, these statistics only report those using long-term-care facilities when there is no insurance involved. There is not enough information about the use of long-term-care facilities when they are covered by insurance to be meaningful. It should be obvious that people are more likely to use long-term-care facilities when they are paid for by someone else than when the user is paying for them himself. Yet, we suspect that most long-term-care insurance premiums have been based on the statistics reporting the use of facilities that were not covered by insurance--an obvious loss to the insurers involved.

We have found cash value life insurance policies to be particularly useful for a variety of purposes, including providing a pool of money for long term care. A properly designed cash value life insurance policy (while we tend to prefer variable universal life policies, fixed policies can also work) can provide a pool of money, accumulated on a tax advantaged basis, that can be used for long term care if needed, and if not needed can be used for retirement or transfer of assets to a later generation. A life insurance policy that permits tax-free loans can be a very tax effective method to pay for long term care facilities. The difficulty is that no one can predict how much long term care facilities will cost in the future or how long the care will be needed. However, the same facts hold true with long term care insurance--at least as it has been configured in the past.

This is obviously a time of transition for the provision of long-term-care insurance. Hopefully, the onrush of baby boomers will appreciate the concern this problem brings before it is too late for an easy solution.

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