The Long-Term Care Insurance Dilemma

Which would you rather do: pay thousands of dollars each year for a product you might never use or risk having to pay tens of thousands per year for an indefinite period of time? For retirees and near-retirees who are contemplating buying long-term care insurance, that is the crux of the issue.

The median annual cost of a private room at a nursing facility is nearly $90,000 nationally, although this figure varies widely depending on location. To help guard against this high cost and others related to long-term care, some choose to purchase long-term care, or LTC, insurance, which can be expensive (average annual cost for a 60-year-old couple for $150 per day of coverage in 2012: $3,381). To make matters worse, many insurance companies no longer offer LTC policies, meaning that consumers may have a hard time finding a policy that suits their needs at a price they can afford. (For more must-know statistics on long-term care, read this article by Morningstar's Christine Benz.)

Last week, we asked Morningstar.com readers on our Personal Finance discussion board for their take on whether to purchase long-term care insurance or to self-insure by saving money on their own. The response was strong, with readers making compelling arguments for and against buying LTC insurance, often backed up by personal experience. You can read the full conversation here. It includes the following excerpts.

'We Feel More Secure Because of It'
Many respondents said they have purchased long-term care insurance despite the high cost, adding that the peace of mind the policy gives them ultimately makes it worthwhile. Some said they were fortunate to get policies years ago, under terms that were more favorable than those available today.

"We bought an LTC policy with 5% benefit increase per year, lifetime benefits for both of us," said btown3. "... Not too many, if any, insurance companies offer this level of insurance anymore. We bought this policy before they realized it was not quite profitable in the long run. We are about to retire early and this policy is large in our financial planning, but we feel more secure because of it. We are middle class and would be wiped out if we needed to fund the care ourselves for several years."

While many readers who bought LTC policies said it was a difficult decision, others said the choice was obvious.

"Buying LTC policies is right up there with drafting a will or picking out a burial plot," GuppaZ155 wrote. "Not fun, but necessary. My wife and I bought LTC policies at ages 49 and 47. Ten-year payments on them, and they adjust for inflation. These policies aren't available anymore, so we lucked out."

Several readers described their thought process in deciding whether to purchase LTC insurance. For example, JerryE said, "This is probably one of the thorniest issues facing near retirement people. You're pretty much damned if you take it and damned if you don't. My wife and I started our policies just before I turned 60 in order to get a reduced rate and take advantage of a discount being offered for joint couples. The combined coverage with a 5% [inflation] rider costs us roughly $6,000 per year in New York. I am now 68 and have eight years' worth of premiums into it. Even though the insurance company is winning right now ($48,000 worth of premiums to $0 reimbursements), I know at any time the insurance company can, and probably will, get permission to raise my rates dramatically. Yet I know that the need for one year's coverage at a nursing home or assisted living facility for my wife or myself will wipe us out if I drop the coverage. Pick your poison!"

Reader tenmile1 said the decision to purchase LTC insurance years ago recently paid off.

"I bought LTC insurance for both spouses at age 76, lifetime care for my wife and limited for me," he wrote. "Ten years later I filed the first claim for my wife, dementia that might last for years. It is protecting my assets big time. That's what insurance does, it covers your risks."

'My Dad Was in a Nursing Home for Several Years'
Many of those who said they've purchased LTC insurance described having firsthand experience with loved ones who ended up needing long-term care.

"We purchased LTC policies for both of us in 1998 at the ages of 54 and 52 after both of our mothers exhausted their lifetime savings on 28 and 12 months of nursing home care," wrote Pintle. "The experience of writing those monthly checks against their accounts and seeing their savings disappear to the point that my mother ended up on Medicaid for the last 12 months of her life convinced us to purchase LTC policies. ... A few years ago we looked into dropping them as we can afford to self-insure now but decided to postpone that decision pending notification of a rate increase. If we get that notification, likely we'll drop my policy and keep hers."

Peskinma wrote, "My dad was in a nursing home for several years. He needed round-the-clock care, which we could not afford. ... His nursing home was very good, however, there was still a sizable patient-to-aide ratio. I was convinced after hundreds of visits that I would avoid that route if at all possible. I chose LTC years ago and when I twinge at the cost I remember coming in and finding him in a less-than-good state because they hadn't gotten to him yet. No thanks. I'll pay the premium and stay in my own home for as long as possible."

Academic said he and his wife, both in their 50s, have LTC policies, and that recent events in his life have reinforced that decision. "My mother recently moved into a memory care home, which is paid for in part by her LTC insurance policy," he wrote. "I came away from this experience seeing the value of LTC insurance." 

In fact, family history often played into readers' decisions to purchase LTC insurance.

"It took a long time for us to pull the trigger on the expense of LTC insurance," Healthcaretech said. "However, we had three parents with long-term stays in nursing homes and one still there 15 years now. So we know all too well the impact on finances at $7,400 a month and, considering our gene pool, opted to pursue the insurance route."

Several readers said they purchased LTC insurance through their employer.

Yogibearbull wrote, "I got LTC insurance via work and the policies for my wife and I continue in retirement. ... I consider LTC insurance to really be asset protection for the middle class. The poor can be covered under Medicaid and the rich can afford to self-insure."

"As a single woman, no kids, I bought into an employer-sponsored LTC policy at age 45," said MadScientist. "The young initial age factor has kept premiums at a relatively modest level. While some people might question the usefulness of purchasing coverage that would probably not be used within 40 years, keep in mind that LTC also covers care in the event of a disabling injury or illness."

Rforno said he saw the value of LTC insurance while caring for his father, who had dementia. So, when his employer offered him a policy, he took it even though he was only 38 at the time. He explained, "At 38 I would pay a lower premium for a longer period of time, get a small annual tax credit doing so, and let time work for me by nicely compounding [the policy's] benefits by 5% annually. Then, if I'm in my 60s and want to pick up a second plan [for additional coverage], I can do so. Sure, I'll be paying more then, but I'd already have a 'running start' with my present plan, which will appreciate nicely over the years if, heavens forbid, I need it." 

'Those Who Really Need Such a Policy Can't Afford It'
Of course, not everyone said LTC insurance is worth it. Many readers decried the policies' high premiums, which in some cases can increase sharply from one year to the next. Some said they plan to self-insure--that is, to set aside a portion of retirement assets specifically to cover potential long-term care needs.

ColonelDan was among those planning to self-insure. "I've seen too many horror stories regarding ever-increasing high premiums, low coverage limits, and then there's always those numerous small-print legalese exclusions that pop up when the help is needed most. No thanks," he wrote.

"My parents bought [LTC insurance] hoping to live the required time to max out the benefits," wrote PatrickBr, "but my dad died a year short of it and the price escalated dramatically in my mom's final years to the point where we canceled and decided to family-insure her. She never would have used it so that was good decision. Made me decide to save more so that I would take the self-insured route [for myself]."

Of course, not everyone has the option of buying LTC insurance in the first place. Danielle said, "We self-insure as I am ineligible due to health reasons and my spouse refuses to purchase it. ... Our plan consists of three well-educated children and two variable life policies, plus other assets. At some point it becomes inheritance insurance, and I suppose that is where we find ourselves."

Several readers agreed with carman's take on the question of whether LTC insurance is worth it.

"I discussed the usefulness of an LTC policy with my financial advisor about 10 years ago when I was 65," carman wrote. "The conclusion we drew then was that those who really need such a policy can't afford it (unless their employer provides a good policy from a top rated firm at reasonable or subsidized prices) and those who can afford it probably have the assets necessary to self-insure. I have seen nothing in the intervening years to challenge that assessment. My own analysis concluded that the LTC policies still available are a much better deal for the salesman than they are for the buyer. Seeing a lot of well-known insurers stop selling policies or price them out of reach has done nothing to change my mind."

Rathgar described an alternative approach to paying for LTC coverage. "Long-term care [insurance] used to be a good value, however we now realize it was underpriced," Rathgar said. "For individuals looking today, self-insuring looks best. Get a price quote on LTC insurance and then invest the premium in an index fund for future growth. You'll have 100% control of the funds. ... If it is [in] an IRA when you need care, your family can take funds from your IRA at a very low or zero tax bracket since you will have the medical deductions to offset IRA income."

While the decision whether or not to buy LTC insurance may seem like an all or nothing proposition, a few readers said they are taking a hybrid approach that utilizes self-insurance as well.

"We are combining a relatively modest [LTC] policy that we were able to buy early with self-insurance," wrote jmat58.

"My wife and I looked at and have purchased a LTC insurance policy," said timmyz. "We felt it was in our best interest to retain some risk by increasing the waiting period and lowering the monthly benefit. We have a good idea what our income will be in retirement and have simply passed the additional risk to the carrier. Consequently, we are self-insuring the short-term stay and insuring the long-term, or catastrophic, stay."

Finally, there was Geoff2, who neatly summed up some key questions one should ask when thinking about LTC insurance.

"I think major factors in your decision-making should include your health record and family history," he said. "Are you currently in good health? Did either of your parents or any siblings spend years in a nursing home or similar facility? Do you have any hereditary conditions? Don't assume that everyone faces the same risk. An LTC policy may make a lot of sense for you but not your neighbor." 

Some comments have been edited for clarity and brevity.