Rethinking the Need for Long-Term Care Insurance

Long-term care insurance continues to be the subject of intense debate among financial pros, not to mention Morningstar readers. A recent study by a team at the Center for Retirement Research at Boston College sheds new light on the need for long-term care insurance--including findings that suggest that, while more people may need long-term care at some point in their lives than previously thought, the duration of that need may be shorter than earlier studies suggest. Anthony Webb, a senior research economist at the center, recently spoke with Morningstar about the study's findings.

Morningstar: There have been previous studies about the effectiveness of long-term care insurance, whether it makes sense for people to purchase it, but yours used a slightly different approach. Can you explain what you did that was different?

Anthony Webb: The approach is really sort of a two-step approach. The first step is to actually get the probabilities of going into care right. What we showed is that the previous research has underestimated the probability of needing care but correspondingly overestimated the average length of time that people spend in care. So, the most widely cited piece of previous research says that men and women, age 65, had a lifetime risk of needing nursing-home care of 27% and 44%, respectively. Our new study shows that the risks are, in fact, higher. They are 44% for men and 58% for women. That is the bad news. The good news is that the average duration of stay for those who go into a nursing home is less than previously estimated. [The study pegs this figure at 1.4 years for women and 0.9 years for men, well below the 2 years for women and 1.3 years for men reported in an earlier study.]

Morningstar: How is it that your results are so different from the earlier studies?

Webb: We made use of a panel data set, and that's a data set that tracks the same individuals over many, many years, which enables us to get a much better handle on the patterns of use over an individual's lifetime. The previous studies typically either used cross-section data, where individuals were observed one time only, or they looked at patterns of usage over a period of maybe four or five years, and they attempted to build up lifetime patterns based on these relatively short periods of observation.

Morningstar: In both your study and earlier studies, the likelihood of women needing long-term care is quite a bit greater than that of men. Is that simply due to greater longevity?

Webb: I think a lot of it is to do with the protective effects of being married. A typical pattern is that a husband is older than his wife. The husband gets sick; the wife takes care of him at home. The husband then passes away. The wife is alone. There is nobody to take care of her, and she ends up going into care.

Morningstar: So, how do your findings change the standard of advice that is given to people with regard to whether or not long-term care insurance is likely to be worth it for them?

Webb: The practical answer is that a high percentage of people who purchase long-term care insurance lapse their policies prior to the ages at which they are at greatest risk of needing care. And if an individual lapses his policy, the premiums are wasted. So, the first piece of advice I would like to give is that you really shouldn't take out a long-term care insurance policy unless you're very confident that you're able and willing to carry on paying the premiums over the rest of your life. The second comment is that for many individuals of modest means--and I don't mean to sound harsh here--Medicaid may be the least bad option. The reason is that if you're an individual of modest means, the primary beneficiary of your long-term care insurance policy is the government, which benefits in the form of lower Medicaid payments. So, for every dollar that you get in long-term care insurance benefits, the government is saving maybe $0.60, $0.70, or $0.80 in Medicaid benefits.

Morningstar: Some experts say that people don't need long-term care insurance if they have too much or if they have too little, but for people who fall in the middle somewhere, it might make sense.

Webb: Yes, I think that's exactly right, that the very, very rich can self-insure. Those who have very little resources really cannot afford the premiums. It's the people in the middle who have a dilemma.

Morningstar: So, where does that middle fall? Is there a certain income band at which you would say that long-term care insurance would make sense?

Webb: I would be more inclined to express it in terms of assets rather than income and say that the people who have a dilemma are those who maybe have nonhousing assets in the order of $250,000 up to $1 million--and that's a relatively small section of the population.

Morningstar: What about the "peace of mind" argument that people make: that even though long-term care insurance is expensive, it's insurance and it's meant to prepare us for a worst-case scenario, so that even if you don't use it, it's still something worth having?

Webb: I really think that that's a decision each individual household has to make. Clearly, the peace of mind has a value. The question is how much else are you willing to give up in order to have that peace of mind? That's a question that only each individual household can answer.

Morningstar: Your study looked strictly at long-term care experiences for singles. However, many couples are weighing whether or not long-term care insurance makes sense for them. Are the probabilities that you cited earlier twice as high for couples in terms of eventually needing long-term care?

Webb: So, married couples have different considerations. They have to consider the impact of care costs on the non-institutionalized spouse; but conversely, they benefit from so-called Medicaid spousal-protection rules that shelter a larger amount of assets. [Note: For more on Medicaid's spousal-protection rules and long-term care, see this article.] So, the concerns about the impacts of care costs on the non-institutionalized spouse are going to increase the value they place on insurance. The more generous Medicaid rules are going to decrease the value they place on insurance. Now, in research that is forthcoming, we find that, given plausible preferences, that married couples will place a lower value on long-term care insurance than the single individuals. The reason is that the impacts of the more generous Medicaid rules more than outweigh the concern about the impacts of care costs on the other spouse.

Morningstar: Many people are on the fence about long-term care insurance. Are there certain risk factors that they should look at in their own lives or their health profiles that would tip them more in one direction or the other?

Webb: I think that if there are risk factors, these are probably also risk factors known to the insurance company and might make it difficult for them to get coverage in the first place. The reality is that insurance companies don't want bad risks, and if you're a bad risk, you'll find it very difficult to get insurance and certainly very difficult to get insurance at an acceptable premium.

Some responses have been edited for clarity.