The last post discussed the different forces that cause people to pay ever-higher prices for long-term care insurance– at the same time when the industry may be less likely to be able to actually pay their claims.
Those problems haven’t been solved yet, and it may be another 25 years before they’re properly addressed. We can’t afford to wait.
“Conventional wisdom” is that the cost of long-term care could easily be $75K/year, and over $100K/year in high-cost major cities. Many Alzheimer’s patients can be in care for 10 years, and other dementia patients for over a decade. Long-term care inflation is running 5-10%, a rate that’s substantially higher than overall inflation (measured by the Consumer Price Index) and even higher than the average CPI over the last 30 years. A patient’s care at a private facility could easily cost $1M-$1.5M.
It’s difficult to accept a cost that exceeds the net worth of many military early retirees. However the long-term care infrastructure is patched together with a number of payment systems where the “private pay” and insurance companies are subsidizing a portion of the care facility’s budget for their Medicaid patients. There’s also a huge difference in the quality of care between a “warehouse” and a facility that staffs a memory-care unit with stimulating activities. Many more families of dementia patients manage to put together a system of home care with paid help (or no help at all). Admittedly if you’re suffering from dementia then much of the quality difference may not be noticed by you, but you’d prefer to not suffer and to not to be a burden on your family. A million bucks seems like a small price to pay for that level of care.
It’s worth remembering that insurance is designed to help the insured cope with a financial disaster– one that may never happen– by sharing the risks with many other people. Ideally, like fire or vehicle insurance, premiums would cost a fraction of a percent. Unfortunately the reality is that many long-term care premiums for a person in their 60s can run $2000-$3000 per year for essentially a total of $300K of coverage limited to a three-to-five-year period. There are also a number of waiting periods, exclusions, deductions, and other caveats. As the last post pointed out, these premiums may actually be too low for the insurance company to make a profit and stay in business long enough to pay out on your own benefits. It’s difficult to know whether you’re paying the “right price” for your insurance coverage when the insurance companies can’t even confidently predict a profit. They just don’t have enough history with their products to be sure.
Financial advisers usually suggest that retirees with a net worth under $1M may want to skip the insurance. The theory is that the premiums would be unaffordable and unsustainable anyway. If long-term care was necessary, the family would quickly spend down their limited assets and then qualify for Medicaid. Although it’s a financial plan, this is not a very reassuring “solution” for a good quality of life and the surviving spouse’s peace of mind. It’s just a safety net.
For retirees with a net worth between $1M and $2M, the financial theory is that insurance is affordable. The insurance might not cover all the costs but it would offer a reasonable quality of care while preserving peace of mind.
If your net worth is above $2M then the cost of long-term care is not considered a financial disaster. You can self-insure your long-term care risks and probably afford to buy life insurance for estate planning. However most families will always feel a little troubled about the “worst case” scenario, so this situation does not necessarily provide peace of mind. If peace of mind is more important than other retirement spending then the cost of insurance would not have a severe lifestyle impact.
How does the Federal Long-Term Care Insurance Program differ from the rest of the industry? First, it’s the nation’s largest pool of long-term care insurance. This spreads the same risk across a larger crowd of paying customers. Second, the insurance company spends less money to market to the eligible customers and to sign them up. This reduces their costs and commissions, allowing the customers to (hopefully) pay lower premiums. Third, the plan choices are streamlined and heavily monitored. Price increases are subject to extensive justification and negotiation. While this won’t avoid misconduct or higher premiums, it will hopefully offer enough oversight to minimize unpleasant financial surprises. Finally, the eligible customers (particularly the military) tend to be healthier and have access to a better quality of healthcare. This would just seem to raise the probability that they’d survive long enough to make a claim, but it also raises the probability that they’d pay premiums for more years before making a claim. The insurance company would be more likely to make a profit and be able to pay out the claims.
This link summarizes the FLTCIP’s benefits and features. Costs of the standard plans are summarized on this monthly premium chart or through this premium calculator. The FLTCIP website also offers a benefits and features comparison worksheet to help assess other LTC insurance plans. Finally, if you’re a Texas resident, this website offers a comprehensive comparison of premiums for different policies.
The numbers in this post aren’t very reassuring, but it’s important to use long-term care insurance only to minimize the impact of a financial disaster. It’s still possible that neither you nor your parents will need to make a claim, and will pay tens of thousands of dollars over several decades for peace of mind. The key is to stay as healthy as you can, to keep an eye on the costs so that you can adapt your financial planning, and to focus on minimizing the financial impact. Once you’ve taken prudent steps to control the risk, then go out and enjoy your life.
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