Consumer Reports concluded in their November 2003 report that “…for most people, long-term-care insurance (LTCI) is too risky and too expensive.”
It may surprise you that LTCI could be too risky. Usually it is not having insurance that is considered risky, but there are safer ways of protecting you and your family than insurance.
Insurance is usually sold on the basis of fear, and LTCI is no exception. The argument is that you need to cover yourself in case you need long-term care; otherwise your spouse or family could waste all their time or assets caring for you. And even if they were willing, the job of caring for someone 24/7 is too much to burden them with. Furthermore, you need to purchase insurance young while the premiums are less expensive and before you have any chronic conditions that would exclude you from being covered.
LTCI salesman use heart wrenching stories to illustrate the potential need for their product. Christopher Reeve is used as an example of why middle aged or even younger people need LTCI. Alzheimer’s patients are used as an example of how long term care expenses can span 10+ years and break a family’s budget.
Alzheimer’s patients often “win” if they purchase LTCI before they are diagnosed. Alzheimer’s patients usually don’t have other medical problems and average eight years in a supervised care facility. The cost for that care at $171 per day is a half million dollars. Only with sufficient savings can you cover the cost.
Medical conditions have shorter average stays. Diabetes averages 4 years. Cancer and pulmonary conditions average 3 years. Stroke is under 2 years, and cardiac conditions are under a year and a half. The average stay in a nursing home is two and a half years, with many patients staying under six months.
For every category of insurance there are some winners and some losers, but the insurance companies are always among the winners. They have to be to stay in business.
Therefore, those who self-insure (and don’t have the overhead of a large corporate insurance company) will probably save money. On average it is better to forgo the insurance or get a minimal amount of extreme disaster insurance, invest what you save on insurance, and build your net worth so that you can self-insure.
Let me be very clear in what I am saying: Some types of insurance are a good idea. But LTCI is better handled by preparing early in life and having sufficient assets to pay for benefits out of pocket. The benefits of being able to pay out of pocket are tremendous.
If you can pay out of pocket, but end up not needing long-term care, you keep your money and can use it for other things or pass an inheritance on to your children.
If you can pay out of pocket, you can buy whatever care you want. A LTCI policy may not cover expenses that you consider essential. Or it may be filled with exceptions that keep you from collecting. Also, Many LTCI policies have waiting periods or partial pay options that require you to have assets to cover the waiting period or your portion of the charges. After paying for LTCI, you may not be able to pay these additional charges.
If you can pay out of pocket, you can invest those assets to ensure that you beat inflation and do not outlive your money. That is not true with LTCI. There is no guarantee that your LTCI company will manage their costs. Some LTCI companies won’t still be financially viable when you finally need them. Or to offset their financial difficulties, some LTCI companies can raise their premiums forcing you to drop the coverage before you can use it. And while some LTCI companies have more expensive policies that adjust for inflation, none beat inflation as your own investments might.
If long-term care was your only worry in the world, then LTCI might be the best answer, but there are multiple worries in life. Will you have enough money for prescription drugs? Will you have enough money for medical care that isn’t long-term care? Will you have enough money for your funeral arrangements? Will you have enough money if something happens to you or your spouse and your retirement benefits or social security is reduced?
Most of these worries have insurance products that you can purchase to help you sleep at night, but that doesn’t mean that you should purchase them all. That would be as wise as purchasing extended warrantees on every appliance you buy to help you sleep at night. Better to save your money and replace the one appliance that breaks early. Buying extended warrantees is riskier than saving and investing the money you would have spent. Will an extended warrantee replace an appliance that you dropped and broke? Will an extended warrantee allow you to buy a different new product? Savings will allow you the freedom to buy whatever product you want, and not simply to replace the lemon you shouldn’t have purchased in the first place.
Invested savings can cover needs and wants for which there are no insurance products. What if you live to be over a hundred? Will you have sufficient assets to continue living if you don’t need assistance? What if you want to travel regularly to see your grandchildren? What if your daughter needs help after a disaster in her life? Will you have sufficient assets saved to be able to help her? There are no insurance products for these concerns. The best insurance is sufficient invested savings.
There is some disagreement on how much invested savings is sufficient to cover your long-term care needs. Consumer Reports suggested that with $1.5M in assets you did not need to have LTCI. One LTCI advocate argued that you would need $10M in order to self-insure. For those with lesser means, there are other alternatives to LTCI.
If you have been reading previous columns you know that by saving and investing as little as a couple of hundred dollars a month you could have a multi-million dollar portfolio by the time you are 55. Our wisdom would be that everyone should self-insure because of careful financial planning earlier in life.
Photo by Lucie Hošová on Unsplash