Did you know that active-duty and retired military are eligible to buy a policy from the Federal Long Term Care Insurance Program?
I never used to care about long-term care insurance. That was for “old people” (hey, I’m not old!!), and I’d have plenty of years for the industry to come up with a great product before my spouse and I needed to worry about it.
But it’s not about me or my spouse. In February 2011 we got “the call” from the hospital about my elderly father. He was no longer capable of living independently with his dementia, and he spent the next six years in a full-care facility. He was a long-time widower, so back in 1992, he was persuaded to buy a long-term care insurance policy. For a small extra fee, he added a 20-year inflation rider. He had nearly $250K of coverage for only the ~$11K in premiums paid over the last 19 years. Financially, he won the long-term care lottery. His coverage just can’t be bought at this price today. Even if it was, the insurance company would go bankrupt trying to pay out the claims.
Did I mention that the immediate family of active-duty military & active Selected Reservists, including your parents, parents-in-law, and stepparents, may also be eligible to buy a FLTCIP policy?
I’ve had my attention forced to the long-term care issue, so I’m going to
occupational therapy learn more and write about it. I thought this was a quickie subject for a short post but my research has dredged up enough material for two posts (and maybe an entire book chapter in the next edition!). Today we’ll talk about the problems with the industry, and in another post, we’ll talk about the actual decision.
Do You Actually Need Long Term Care Insurance?
One of the challenges of the long-term care decision is determining whether we (or our elders) will actually need it. Today’s oft-quoted statistics give the impression that it’s almost a certainty: we (and our parents) will all spend years in a care facility before passing away. The reality is that the statistics are designed to evoke fear… and the sale of long-term care insurance.
I’m not going to cite those numbers– they’re all misleading. Like the Consumer Price Index, they’re applicable to large groups but not very applicable to each one of us. It’s easy for actuaries and insurance companies to predict that you’ll spend time in a care facility, and to claim that the likelihood will rise every year. They make long-term care sound as inevitable as death & taxes. However, it’s based on the same logic flaw as the prediction that the older your home becomes, the more likely it will burn down.
The reality is that newer homes have stricter codes and better fire-prevention technology, so the homes that burn tend to be older. The cause of the fire is not age– that’s just a side effect. Of course, the difference is that fire insurance is cheaper than long-term care insurance, so it’s a lot easier to decide to buy it without having to become an expert in statistical correlation.
Another prediction from the insurance and medical industries is that more people are living longer and that [insert scary percentage here] will be afflicted with dementia and Alzheimer’s. The issue with these numbers is another problem of cause and effect. Human longevity hasn’t risen much over the last century, but a lot more of us are getting better at avoiding other causes of death. This distinction may seem like the nasty semantics games inflicted on us by our high-school English teachers, but it’s a critical one. Our individual genetic risk of dying of Alzheimer’s is the same as it ever was, but our lifestyle risk of dying from just about everything else has gone down. Our medical risk of dying of many lethal diseases has also dropped, so these reductions make the rate of Alzheimer’s look like it’s rising.
The media is doing a great job of adding to the fear and uncertainty. People buy newspapers and magazines to read frightening facts of the perils of Alzheimer’s, or the struggles of families coping to raise their children while caring for their parents. Editors and journalists are keenly aware of what sells their media, so they dig up even more alarming facts and figures. But the statistics have not changed– we’re just forced to become more aware of them.
Those last four paragraphs might make my old statistics teachers happy, but they’re not very reassuring to the rest of us. You may have realized by now that all the lifestyle and medical advances have accomplished is to make it easier for us to stick around long enough to be killed by Alzheimer’s. Gosh, maybe we really should all go buy long-term care insurance!
Not so fast. Here’s a problem that the insurance industry is just beginning to figure out with more data and more computing power. It turns out that for decades, death rates have been dropping. (See this chart from a 2004 United Nations report.) People who would have died of smoking or alcohol or from drunk drivers or from not wearing seat belts are now avoiding these deaths to stick around long enough for their cohort to develop Alzheimer’s. Meanwhile, the insurance industry has been selling these people long-term care policies with the assumption that a certain percentage of them are going to die from other causes so that the insurance company won’t have to pay out. Unfortunately, their customers are avoiding most of those other causes, and more survivors means that there are more claims on long-term care policies.
Good ol’ competition has amplified this problem. For example, John Hancock’s actuaries will (eventually) carefully calculate the statistics and the probabilities to determine the rates they need to charge to make an acceptable profit. However, these statistics and probabilities are evolving and subject to interpretation and data-mining. Met Life’s actuaries will do the same analysis, but they’ll probably arrive at different numbers. If Met Life’s numbers result in lower premiums than John Hancock, then Met Life will probably sell more policies. John Hancock’s unhappy sales agents will ask their actuaries to take another look at their numbers and squeeze a few more pennies out of the premiums. The companies might even decide to reduce their commissions and profit margins to get more sales, knowing that they’ll earn less on each policy but hoping to make it up on higher volume.
These insurance decisions have what are known as “long tails”– the results of today’s pricing decisions may not become apparent for years, even decades. If the company uses outdated data in its decisions, or if only their healthiest customers buy their policies, or if they’re wrong about the cost projections, then they’ll lose money. If the policy permits, they’ll raise the premiums. If the company loses money, then it might not be able to pay out on its promise. Unfortunately, many insurance companies have been losing money on each policy… and getting punished even more for trying to make it up on volume.
All of these developments have two effects on the customers. First, their media-enhanced perception of the hazards of dementia and Alzheimer’s makes them much more likely to lock themselves into a long-term care policy. If the company raises the premiums on their policy then they’ll feel obligated to keep paying. (Economists and investor psychologists call this the “sunk cost fallacy“. ) Second, when their worst fears are realized and they need to make a claim, the insurance company may not be able to pay out. It might go out of business, and the state/federal regulators might not have the funds to insure the insurance company.
How Do We Handle These Problems with Long-Term Care Insurance?
The section above discussed the different forces that cause people to pay ever-higher prices for long-term care insurance—all while 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 section above 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.
Federal Long Term Care Insurance Program
FLTCIP open enrollment season
Military long-term care insurance
During retirement: Healthy lifestyle
Military retirement spending: how much will I need?
Military retirement: how much can I really spend?