Is Long-Term Care Insurance Right for You?

Few financial-planning issues are more confusing and fraught with emotion than the decision about whether to purchase long-term care insurance.

Like all types of insurance, your need for this type of coverage is unknowable; you're insuring yourself against a risk, not a certainty. Insurance companies haven't helped matters. With many pushing through steep premium increases and denying claims to certain policyholders, purchasers and would-be purchasers of this coverage have had good reason to question the value proposition of a long-term care policy.

At the same time, an extended need for long-term care can also gobble up an investor's nest egg and then some. Specific tallies vary by geography, but the cost of a private room in a nursing home averaged more than $200 a day--or roughly $75,000 a year--in 2009, according to the National Clearinghouse for Long-Term Care Information, a website produced by the U.S. Department of Health and Human Services. (Costs may run even higher in high-cost urban centers.) Even those who need a relatively limited level of care--such as a visit from a home health aide three days a week--could pay $18,000 a year for that type of help.

My recent sampling of Morningstar.com users' opinions, drawn from a recent thread in the Investing During Retirement forum of Morningstar.com, illustrates the broad divergences of opinion on this important topic. While some users have purchased this type of coverage and never looked back, others are skeptical, citing shady insurance company practices as well as their own ability to self-insure as key reasons to go without the coverage.

Rising Premiums, Denied Coverage Are Key Worries
Many posters cited premium increases and the chance that an insurance company might deny a claim as key reasons for avoiding long-term care coverage. Poster ColonelDan is among those who won't be purchasing long-term care coverage, noting, "[I've seen] far too many horror stories of many years paying ever increasing premiums; then, when it's needed, many costs aren't covered. It's very convenient for the insurer, but bordering on the 'scam' category in my view."

Poster Lonnie aptly likened the potential for rising premiums on a long-term care policy to a variable-rate mortgage: "Right now it seems a lot like buying a variable-rate mortgage. The costs go up in an unpredictable manner so it is impossible to figure out how much it will cost in future years. The insurance industry has yet to figure out how to price the long-term care insurance product appropriately. This is likely a 'sub-problem' within the unpredictably rising health-care cost issue. That issue does not seem like it is being solved, and the long-term care insurance cost problem is not going to be solved until then."

Punter76 also finds the prospect of rising premiums worrisome: "Would you buy life insurance from a company if you thought the company would keep the premiums reasonable for 20 years and then start increasing the premium by 40% or 50% per year after that, based on its exposure? As I understand it, an insurance company has that right with long-term care. I declined long-term care insurance. The reason for insurance is to have the insurance company assume a risk."

Poster Stupidone shared the following experience: "We purchased it about 10 years ago on an exceptionally good offer sponsored by the local teachers' association. Within a year, the 'too good to be true' was!. The company announced very steep rate hikes. Since we felt we had enough savings to go it alone, we canceled the insurance as a bad bargain."

In addition to worries over rate hikes, other posters cited concerns that the coverage might not be there when they needed it.

Dtconroe shared just such a story with his post: "My wife and I have chosen to not purchase long-term insurance. Our recent experience with her father and mother both passing away has raised doubts about long-term insurance. Her mother had long-term care insurance, and I consider the insurance company as unethical, refusing to acknowledge a sudden ovarian cancer, and refusing to cover her needs during a relatively rapid decline in health. I know that long-term care insurance makes sense in theory, but I have determined that insurance companies will sabotage the policy and basically do everything possible before permitting any use of the policy--so what is the point?"

Poster Eahines41, while an owner of several long-term care policies for himself and his wife, voiced concerns about many insurers' claims-paying ability. "What you need to make this purchase work is rock-solid financial stability for a long period of time. As you know, most people do not have rock-solid financial stability. Therefore it is very unlikely they will ever collect on long-term care insurance."

Some users voiced doubts that the length of a long-term care stay would justify the years of premiums they would pay for such a policy. Rickydee wrote, "Both of my parents passed away in the last couple of years, and they would have used the benefit of long-term care insurance for a very short period of time (assuming there was no resistance from the insurer). I will self-insure unless I can be convinced otherwise."

Financial wherewithal--the ability to self-insure if need be--was another often-cited reason to forgo long-term care coverage.

Wagnerjb wrote, "I have decided against it, as I have enough assets so that I can afford the long-term care if it turns out to be necessary. I prefer to self-insure for the events that I can afford to deal with, such as the many smaller events (insurance deductible, appliance failure, and so on). While this isn't a tiny expense, I consider it within my means to handle."

RAKendall, meanwhile, argued that the best prescription for staying out of a long-term care setting is staying fit (and enjoying life). "I long ago decided that strenuous exercise was the best policy for me, and it has paid much better dividends in the form of excellent health at age 81. I couldn't afford my dark beer habit if I had to pay for insurance."

Valuable Peace of Mind
Yet as vociferous as the anti-long-term care insurance contingent is, other posters believe that this type of coverage is right for them.

TaylorZR plans to purchase this type of coverage at age 62, noting that the horror stories are overblown. "My mom recently passed. She had a great long-term care plan that paid most of what she needed for care during her last several years, with no horror stories! Her plan was comprehensive and she was able to receive benefits at home. Everyone and every situation is different, but if affordable, buying a plan can be a gift to yourself, your spouse, or your family." Taylor also offered several tips for analyzing a policy in the thread.

Personal experience also convinced RDBNevada of the benefits of long-term care coverage. "My parents had long-term care insurance purchased around 1990, and in the last few years of their lives they relied on that to provide in-home assistance that allowed them to stay in their own home. They were frugal people and even though they could have paid for the caretakers, they would not have spent their own money to provide the level of care they needed. At one point my dad considered cutting back to four hours of care a day from the eight hours they had. I considered that to be unrealistic and potentially dangerous. I was able to talk him out of that notion only when I pointed out that the long-term care insurance company covered up to eight hours per day."

Poster Anon2010 also had a good experience with a parent's long-term care insurance, but noted that past is not prologue: "I had it for my mother who lived on it for more than three years in a nice assisted-living facility before dying at 87. It had a cap of about $250,000, which she did not use up. [I] had no problems and was very satisfied with the company, but understand that was the past; it's all changed."

SailerBob, who already owns policies for himself and his wife, has also not experienced the rash of rate increases that other posters implied. Poster Kellen, too, hasn't observed big premium hikes since purchasing the coverage. "My wife and I bought long-term care insurance about 12 years ago and are now getting ready to retire. We bought it at a relatively young age because we figured it would be easier to afford a relatively small payment for a longer period of time rather than a larger payment over a shorter time period. Our premiums have gone up once in 12 years."

Several users acknowledged that they could probably self-insure if need be, but have chosen the coverage in an effort to avoid being a burden on their children, to preserve assets for their kids, or to avoid prematurely depleting their nest eggs.

Yakers wrote, "[My] wife and I have long-term care insurance [that] would cover us for three years and also has in-home service. It is mostly so our children do not have to care for us. Our daughter-in law has multiple sclerosis and who knows how that will go in, say, 20 years. Our younger son is just getting out of college, so that possible assistance is unknown."

SailerBob wrote, "Our assets are such that I could possibly self-insure for this, but we have a burning desire to leave assets to our kids and grandkids upon our deaths. Using up those assets in a nursing home will obviously make that nearly impossible."

Kellen is also thinking about the kids, writing, "At the time we bought [a long-term care policy] we had no idea whether we could self-insure. However, we did know that we didn't want to have our estates, built up over a lifetime, disappear in a few years, leaving our children with nothing. The amount we pay in premiums seems reasonable to us under these circumstances."

Yeagermj, meanwhile, was spurred to buy a policy based on concerns about needing to pay for long-term care early on in retirement. She was glad she did. "Although we have enough assets that some would self-insure instead, I was concerned about our savings taking an unexpected hit in the first 10 years of retirement during which our 'pot' is supposed to grow according to our financial model. If the premiums grow too much at some point, the policy allows us to cut back to three years of coverage and/or less payout per day. I figured at age 75 we could re-evaluate the size of our savings, health status, current living expenses, and so on, and make adjustments accordingly.

"Then the crash hit later that year, and, boy, am I glad we have that extra cushion for unexpected expenses. We're still saving a hefty amount before 65, but at least I feel we can still travel while we can without worrying about every penny we spend. I've done all the time-value of money calculations on the premiums we pay, but we figure it's worth it. Timing is everything when you're pulling money out of your nest egg."

On a more basic level, Modenesi questioned the concept of self-insuring for long-term care but not other types of potential calamities. "The ability to self-insure is a slippery slope. I bet that those who claim they can self-insure, nevertheless have homeowners insurance, and even if they can self-insure a house fire, who would choose to do so? Long-term care coverage can cost as much as having a house destroyed by fire, and the odds of needing long-term care are likely much greater than the house fire."

Tips and Traps
Several users who are versed in long-term care shared tips for making this important decision and, if they decided to move forward, selecting and managing the coverage.

In terms of when to buy such coverage, Bjinma says earlier is better, because you're less likely to have serious medical problems that would disqualify you from coverage. "I am 66 and my husband is 70. We purchased our long-term care insurance (Genworth) about 10 years ago. Even though the cost may be increasing, I think it was a very good move. We have paid about $30,000 in premiums during that period, but if we bought it now, we would be paying much higher premiums. And, the most important part, I do not think we would be able to buy it now since both of us have had disqualifying diagnoses since then. People have to investigate it for themselves. Each situation is different. In our case, we did not have a portfolio large enough to self-insure without a hardship. I know that costs are on the rise even for established policies, but I still think it was the right move for us. Better safe and cared for if the time comes and we need it than sorry and poor!"

ChiefK, meanwhile, notes the importance of purchasing a policy whose benefits increase along with inflation. "I did buy the automatic inflation protection. I think anyone under 70, or not chroniclly ill, should default to that. If you are not sure, take the inflation protection."

Darwinian's tip was to make sure your policy doesn't lapse, even if you forget or are unable to pay the premium. "Your long-term care policy probably allows you to designate a friend, financial advisor, or family member to be notified, if you fail to pay the premium. Do it! Don't think about it, don't put it off. Do it now! And write yourself a reminder to update this designation if necessary."

RDBNevada, while happy with long-term care insurance overall, noted that less may be more when it comes to coverage, particularly given that the average nursing-home stay is a little more than two years. "After I learned more about long-term care insurance, I concluded that we are probably overinsured. If I had it to do over again I would have purchased more of a 'short and fat' plan, rather than the extended versions we have. Something like a three-year plan for me, and five years for [my wife], with a higher daily benefit. Of course my wife would disagree, as she is very happy with the security of the lifetime plan."

User John Arnold shared how he and his wife had learned the hard way about the importance of thoroughly researching a company's financial condition before taking the plunge. "My wife and I purchased long-term care insurance about 13 years ago at the age of 55. We decided to do it because we are not wealthy, and we need to pass on an inheritance for a special-needs situation. Our insurance provider has gone through bankruptcy and then been taken over by a state-run organization. Obviously this is scary. Lesson learned: We chose this company based on a broker recommendation for a particular type of nursing care. We should have shopped the market for a better-rated company."

Yogibearbull concurs that knowledge is power when it comes to this important decision. "American Association for Long-Term Care Insurance (AALTCI) is a trade association that has an interesting FAQ on Life Insurance + LTC under Learning Center. Being a trade association, it obviously promotes LTC to insurance brokers and consumers, but it doesn't sell any LTC itself."

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