Is Long-Term Care Insurance Really the Right Choice?

Many Americans have heard that long-term care can be extremely expensive and that it’s important to begin saving, or alternately to invest in long-term care insurance, as soon as possible. But is long-term care insurance really all it’s said to be? Are there other options for elder care? A recent PBS interview with economics professor Lewis Mandell suggests that simply saving money, rather than investing in these insurance plans, may ultimately be a larger help to the elderly.

What is Long-Term Care Insurance?

The U.S. Department of Health and Human Services (HHS) explains that long-term care insurance is special in that it’s “designed to cover long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.” These policies work by reimbursing policyholders with a pre-selected daily amount “for services to assist them with activities of daily living such as bathing, dressing, or eating.”

The cost for these policies can vary widely, depending on a number of factors, such as your age when you purchase the policy, the daily limit for the policy, the maximum number of days or years that that policy will pay, and any additional benefits you choose. Older adults who are in declining health or are already receiving long-term care won’t qualify for a policy.

Downsides to Long-Term Care Insurance

According to Lewis Mandell, these policies are becoming even more expensive, “primarily because people are living longer.” In other words, if insurance companies are going to have to pay for more care, the price of the policies is going to rise. Yet at the same time, many commentators believe the benefits from long-term care insurance are “inadequate” at best. So what are the drawbacks to these policies?

First, on average these policies will only pay up to $150 day for a maximum of three years, and most “won’t pay for the first 90 days,” according to statistics gathered by AARP.

Second, the policies don’t properly adjust for inflation. Many of these policies do adjust for simple inflation, or 5 percent per year. On first glance, a 5 percent-per-year increase can look accurate when it comes to rising nursing home costs (which, by the way are close to $95,000 per year). However, according to Mandell, “a simple inflation adjustment adds 5 percent of the original benefit per year and does not compound like actual inflation.” For example, with simple inflation, a per diem rate of $150 will increase to $225 in 10 years’ time, or by 50 percent. However, the actual cost for care will increase to $245 in 10 years’ time, or by 63 percent with 5 percent annual compounded inflation. In short, the policies aren’t likely to provide enough money to pay for actual care.

Third, most of these policies aren’t going to pay for more than 3 years of care at $150 per day. According to Mandell, that’s about $165,000 without inflation adjustments. Most adults who can afford to pay the premiums for long-term care insurance can save this amount before they’ll need it.

And finally, many older adults don’t end up collecting on long-term care insurance policies. Based on data from an article in the Wall Street Journal, “about two-thirds of seniors stay in a nursing home for less than 90 days, which means that they get no compensation from their policies.” Remember, long-term care policies don’t start paying out until you’ve needed care for more than 90 days. And additionally, “fewer than 4 percent of seniors currently reside in nursing homes,” which means most aren’t receiving benefits from their policies. Indeed, most policies require beneficiaries to be unable to perform “activities of daily living” in order to collect, which leads many individuals who are insured—but who can still dress themselves and eat on their own—to have their claims denied.

With the aging baby boomer generation, we’re likely to see more issues for older adults in the coming years. If you have questions about caring for your elderly loved one or filing a claim, the experienced elder law attorneys at the Walton Law Firm can speak to you today.

Photo Credit: Nicolas Alejandro Street Photography via Compfight cc

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