Long-Term Care Insurance

Should I buy Long-Term Care Insurance (LTCI)?

According to the U. S. Administration on Aging, LTCI pays less than 5% of nursing home bills.  Why are so few people buying LTCI? After all, everyone who has had to use their LTCI is happy they bought it.  A vigorous advocate for LTCI, Martin K. Bayne learned at age 45 that he was afflicted with Parkinson’s disease.  Fortunately for him, he had purchased an LTCI policy four years before his diagnosis.  Why shouldn’t all of us follow his example?

Bayne put his finger on it, at least in part.   "Most people don’t buy LTCI at age 40,” he said in a February 2001 interview, “it’s not their fault! Regardless of whether their employer has offered it to them, people in their 40s worry about sending their kids to college and paying their mortgage, among other financial concerns.  Who would expect them to start thinking about paying for nursing home care?"

Working people buy insurance.  They insure their homes and cars; they buy life and health insurance; many even buy disability insurance.  However, the LTCI agent meets unusually stiff resistance.  Partly this is due to the high cost and the fact that the favorable time to purchase it comes when many wage earners are still struggling with other commitments.  It is also due to reluctance to admit the possibility of going into a nursing home.

The federal government encourages the purchase of LTCI through tax incentives.  The federal government also attempted to establish a plan for federal employees, but there is little incentive, if any, to buy into the plan, compared to insurance purchased privately.  Whether to buy LTCI is a complex financial planning question.

How can I get unbiased information?

There is no lack of information on the Web about LTCI.  A lot of this comes from folks who have a vested interest in selling it.  The American Health Care Association offers a number of “Issue Briefs” arguing that the government should subsidize the purchase of LTCI at http://www.ahcancal.org/News/news_releases/Pages/24Jul2008.aspx.  The information on this Web page is accurate, but not unbiased.  The AHCA and its associated organization, the National Center for Assisted Living reflects the view of the nursing care industry that paying privately or through insurance is preferable to qualifying for Medicaid.

Similarly, the Center for Long-Term Care Financing (http://www.centerltc.com) warns that the long-term care system is in crisis and that the solution is for everyone to plan on paying privately for their long-term care needs, whether at home or in a nursing home.  Of course, since most people don’t have the money to do this, the CLTCF tells people to buy long-term care insurance.

Can I rely on Medicaid to pay for my long-term care?

There is little reason to buy LTCI if Medicaid will pay the nursing home? The CLTCF says, "Medicaid is a means-tested public assistance program.  It is welfare intended as a safety net for the genuinely needy.  The program has a dismal reputation for problems of access, quality, reimbursement, discrimination and institutional bias." Is this true? Are nursing homes that accept Medicaid inferior to those that do not?

Consumer Reports found that to promote their products, LTCI agents frequently disparaged Medicaid, implying it provides substandard care.  But the magazine found the quality of a nursing home has little to do with who pays the bill.  LTCI is not for everyone, says Consumer Reports.  The magazine advises against it for those who might qualify for Medicaid in entry into a nursing home or soon thereafter.  For middle-class households where there is roughly $250,000 available for care, without impoverishing the other spouse, LTCI would be worth considering, but not essential.

Some have analyzed the problem of financing long-term care and concluded that LTCI is unlikely to ever make a significant dent in meeting these costs.  See, for example, a study for The Commonwealth Fund by Mark Merlis, "Financing Long-Term Care in the Twenty-First Century: The Public and Private Roles," September 1999; http://www.cmwf.org/programs/elders/merlis_longtermcare21st_343.asp.

The industry lobby says that the long-term care system is a wreck.  Major nursing home chains have filed for bankruptcy protection and some claim that liability suits against them are driving them out of some states.  According to the voice of LTC insurance, Center for Long-Term Care Financing, it is the height of irresponsibility to advocate continuing reliance on Medicare and Medicaid.  They say that only private money will save this system.

Is the long-term care industry really in crisis?

Experts disagree.  Joshua M.  Wiener and David G.  Stevenson of the Urban Institute assert that "the hard reality is that the current method of Medicaid long-term care financing is quite economical.  Payment rates are usually much lower than Medicare and the private sector.  Persons receive government help only after depleting most of their assets.  Finally, the institutional bias of the delivery system limits services largely to persons with the most severe disabilities who do not have family supports.  Within this system it is difficult to obtain large savings." See Weil, There's Something About Medicaid, Health Affairs, Volume 22, Number 1, January-February 2003, 13-30).

The insurance-buying public is not likely to stampede insurance agencies in a sudden, overwhelming compulsion to by LTCI, just as federal and state governments are not likely to cut off funding for long-term care.  Long-term care will continue to be heavily supported by government programs while LTCI will protect the assets of clients who are moderately well off.  The financial planner will need to know what part LTCI will play in wealth protection.

What factors should I consider in an LTCI decision?

The first step must be to analyze the risk involved.  There are long-term care patients–some in a persistent vegetative state–who remain in nursing facilities into their third decade.  Care in some regions may be $10,000 per month.  Twenty years at $10,000 per month would be $1.2 million.  However, the cost of care in most parts of the country is less than $6,000 per month and few nursing home patients survive more than two years.  Furthermore, the Medicaid look-back is three years, so nearly anyone can transfer away all of his or her assets and qualify for Medicaid in three years.  Therefore, the financial risk is not likely to exceed $150,000.

The other component of risk is the likelihood of going on-claim.  A factoid appearing in LTCI literature is that “the average stay in a nursing home is two years.”  While this may be true for some subset of the population, it cannot be true that the average person will spend two years in a nursing home.  The government census suggests otherwise.  According to the U.S. Census 2000 Special Tabulation, approximately one in six persons 85 years of age or older was in a nursing home.  Since the life expectancy at age 85 is between five and six years, the average stay cannot be much greater than one year and the percentage of nursing home residents younger than 85 is quite small.

A more pessimistic measure of the risk puts the proportion of Americans over the age of 65 who will enter a nursing home for long term care at 39%.  Of those, approximately half will stay there for an average of 2.5 to 3 years, and 10% will stay for five years or longer.  Muaugh, Christopher M. “The Amount, Distribution, and Timing of Lifetime Nursing Home Use,” Medical Care, Vol 35, No 3, April 1997. 

If most people will have less than a year of nursing care and only a small minority will be in nursing care for more than two years, the likely “loss” is less than $150,000.  The premium to protect against that level of loss is relatively high.  For example, a comprehensive benefit of $150 per day, with a five-year benefit period, at age 59,  was calculated to be $163.72 on the federal LTCI calculator.  Since the premium would probably be paid for 26 years before the insured would have an appreciable likelihood of going on-claim, a similar investment at 3% would add up to $77,000.  All this suggests that a client should carefully analyze any decision about LTC insurance.


Important factors include:

  • Do I have assets of $100,000 or more to protect?
  • Am I living month-to-month on social security or other investments with very little stretch in the budget?      
  • Do I have more than $1 million, or do my wife and I have $2-3 million in assets, and are thereby able to “Self Insure?


Planning ahead is vital.  Many diagnoses will prevent a client from qualifying for LTC coverage, for example:

  • Memory Loss
  • MS
  • Parkinson’s Disease
  • Dementia
  • Cirrhosis of the Liver
  • Some Cancers
  • Stroke
  • Multiple TIAs (mini strokes)
  • Insulin-Dependent Diabetes

If you are interested in buying LTCI, there are many types of policies and riders to factor into the choice of which policy to purchase.  Retirement plans are also important.  If the intent is to retire in Florida, the cost of LTC care will be higher than it would be in Missouri or Arkansas, but much lower than around Boston or New York City.  Your estate advisor should make some investigation into the Medicaid climate, but it is not a major factor.  Medicaid rules change too frequently, and are unreliable for the length of time involved in estate planning for the middle-aged.

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