One of the most difficult questions that I get is whether or not people should buy long-term care insurance (LTC).
My views have changed over time and are likely to continue to evolve and I don’t claim to be an expert in this field.
Historically, I thought that the policies were too expensive and often passed on the rule of thumb that I had heard, which has three parts.
- If your net worth is less than $500,000, don’t bother because you’ll go broke quickly and will qualify for Medicare.
- If your net worth is over $1.5 million, you don’t need to buy LTC insurance because your can ‘self-insure,’ which just means pay out of pocket.
- If you land somewhere in the middle, it may make sense to buy LTC insurance.
Over the last ten years, I’ve seen study after study that shows that Americans are underinsured in this area, since 70 percent of Americans over 65 end up needing some form of long-term care.
And, as everyone knows, long-term care is expensive: the average nursing home is $87,000 per year across the USA, although it’s not uncommon for our clients to pay for more expensive facilities.
While researching this article, I found the following long-term care costs by state, created by Genworth. Keep in mind that they are in the business of selling long-term care insurance and we have no affiliation with Genworth, but still, the information is very detailed and fascinating. Click here for the information.
A recent study by Boston College’s Center for Retirement Research is questioning the traditional wisdom about buying LTC insurance.
Their research focused on the average length of a nursing home stay and measured in months, as opposed to previous studies that looked at the stays in years. They found that the average stay is 30 percent shorter than previously thought – less than one year for men and 17 months for women.
Of course, as I’ve noted before, averages can be misleading. A different study showed that 70 percent of nursing home stays are less than 90 days, which means that the stays are typically covered by Medicare, which generally covers the first 100 days. For the average stay to be 12-18 months, the remaining 30 percent of stays must be quite a bit longer, lasting two to three years.
Ultimately, the study concludes that LTC insurance only makes sense for the wealthiest 20 percent of men and 30 percent of women, which is actually a lower threshold than the rule of thumb that I had heard since it only takes $260,000 in assets to put a household in the wealthiest 25 percent of all households.
I’m not sure that my initial theory that LTC insurance is expensive is right either. While it’s true that the cost of the policy can be high, most insurance companies (including Genworth) have found that they underpriced the policies and have suffered losses and have had to raise prices.
Like many financial planning choices, the decision to buy LTC insurance may not be entirely financial. A lot of people, including me, believe that having the insurance will lower the financial and emotional strain that comes along with long-term care.
Unfortunately, there is no single one-size-fits-all answer and each family will have to decide for themselves what makes the most sense for them.