This article is the fourth and final one in a series about long-term care (LTC). In the last article, I alluded to long-term care insurance (LTCI) as one of the ways to fund long-term care.

In this article, we’ll look at LTCI in more detail—what it covers, what it costs, and whether you should buy it. (Spoiler alter: I can’t answer that question for you.)

What are the odds?

Many retirees will require some amount of long-term (nursing home) care during their lifetimes. As we have seen, the costs are high and are not covered by Medicare (unless you are admitted to a Medicare-certified care facility within 30 days of a hospital stay of 3 days or longer). The chance that you will need some form of LTC is reasonably high.

However (and this is a critical point)—the odds that you will need it for a very long time are not nearly as high.

Some LTCI advertisers make statements like, “almost two-thirds of Americans will require long-term care,” and “long-term care will cost between $70,000 and $100,000 a year.” Interestingly, both statements are “true” while also being somewhat misleading.

According to the U.S. government, someone 65 years of age has a 70% chance of needing some kind of long-term care services. In other words, it may not include skilled nursing home care; it may only be in-home support.

Note that the government didn’t say, “70% chance of needing LTC for a long time.

A 2017 study by the Rand Corporation found that about 56% of us will need at least one day of LTC, and women are more likely to need care (64.1%) than men (50.6%). (They live longer.)

Rand also found that the total days of care at the 50th percentile was ten (10) for men and women combined. Also, there is a 10% or less probability of needing care for more than 1,000 days (approx. 2.7 years); 25% will spend little or no time in LTC.

It appears that the need for some form of LTC is a high-probability event (70%), which may be provided in-home or in a care facility. But the probability of spending an extremely long time in a care facility is much less, and some will never be in one.

Based on an average cost of $90,000 a year, someone who spends the average number of 10 days in an LTC facility will spend about $2,500, possibly a manageable amount. Even if they spend ten times that amount (100 days at the cost of $25,000), it may not break the bank.

Therefore, we can conclude that a large number of retirees won’t have a significant LTC problem. However, some will have costs that exceed $25,000; and a few will far exceed it.

In other words, for any given individual, LTC costs can range from zero to millions. Planning is challenging for something with that kind of uncertainty.

What is the cost?

According to the American Association for Long-Term Care Insurance (AALTCI), the average cost of insurance for a couple of age 55 with both in standard health is about $2,400 a year based on a $150 daily benefit and a maximum three year benefit period.

LTCI premiums rise substantially based on age and health condition. And 24% of people age 60 to 69, and 45% of those 70 to 79, are declined for coverage.

If you purchase coverage at age 55 or 60, you could be paying premiums for 20 or 30 years. And this is a real kicker—the premium is not “fixed”; the issuing company can increase it at any time in the future.

Another thing is that LTCI may not insure us against a “worst-case scenario,” such as the need for many years of care, due to lifetime limits on coverage. Most plans cover at most 2 to 4 years of care. This is important to know if you consider buying LTCI to cover a “worst case” scenario, which would be entering an LTC facility at a relatively young age and staying there for the rest of your life.

What is the benefit?

The financial analysis to make a rational decision about LTCI is difficult. We don’t know what future LTCI premiums will be, how long we will be paying them, what the limits on benefits will be, or what our need for LTC will be, if at all.

Many LTCI policies are sold on the basis that it can “protect your assets,” but once you are retired, you will be using a significant part of your assets to pay the premiums, possibly for several decades.

If you choose not to buy it, you may have to spend down your remaining retirement assets to effectively self-insure for whatever long term care you need, and some people would rather not have to do that. So, a significant chunk of your assets will go toward paying for it, one way or another.

The main data points you need to analyze the potential value of LTCI is are relatively few. Here are the basics:

1. Your premium is what you pay each month for the policy. The big issue, however, is that this number may change (and probably will). Assume it will rise at least as much as inflation, if not more.
2. Your total benefit, also called the policy or benefit limit, is the most your policy will pay out in a worst-case scenario. In other words, insurance companies pay benefits up to a certain amount and no more. (The maximum benefit may increase with inflation.)
3. Your time in LTC is the unknown that, ironically, has the most significant impact on any kind of cost/benefit analysis. If you only need a few days, weeks, or even months at the end of your life, paying premiums for 20 or 30 years could be a big waste of money.
4. Your daily/monthly cost of long term care is the cost of care in your state. You can use an average, or get quotes from actual service providers. (This cost may increase due to inflation.)
5. Your investment return (if you want to self-fund it—this is what you would earn if, instead of paying an insurance premium, you chose instead to invest the money in stocks and bonds. Best to use a relatively conservative value of 5% to 7%.

To perform a conservative analysis, you might assume that you will use the entire benefit starting at age 80 after paying premiums beginning at age 55 (25 years). (Note that this is a very low-probability event—about 10% or less, according to the Rand study.)

You could use present or future value analysis methods, but for illustrative purposes, I am going to do some basic calculations instead.

Let’s say you get a quote of $350 per month for the two of you with a guaranteed lifetime benefit of $350,000 in current dollars. If we don’t make any allowance for inflation, tax implications, or premium increases (huge assumptions), we can do some simple math to come up with the total cost of premiums:

$350/month x 12 mos. = $4,200/year x 25 years = $105,000.

Next, we assume that both you and your spouse receive your full benefit (a highly unlikely outcome). Comparing the total premiums of $105,000 with the total benefit of $350,000, we get an LTCI “advantage” of $245,000.

But what if instead you only need the average amount of time of 10 days in LTC? Assuming a cost of $250/day, we can do the following calculation:

$250/day x 10 days = $2,500.

At a total premium of $105,000, that’s an LTCI “disadvantage” of $102,500.

Now, what if you invest the money instead? If you invest $350/month for 25 years at an average annual return of 6%, you will have a balance of almost $250,000.

You would have invested $105,000 but will have $250,000 total in savings. That is a net gain of $145,000 ($250,000 – $105,000) that could be used to pay for LTC.

Granted, that is less than the $350,000 that would be available from the LTCI policy in a worst-case scenario. But if you need LTC for only a few days or months and cover it with savings, you will come out ahead.

What should you do?

I will be the first to admit, that was a very basic analysis. It would be better to do a present-value analysis that takes into account taxes, inflation, etc., as well as the alternative of investing the monthly premium in something with an average annual return of 5% a year.

As the math shows, LTCI works much like life insurance or an immediate annuity. If you need care starting when you are relatively young, you win. If you don’t receive it until much later, or need it only for a brief time, or not at all, the insurance company wins.

So, what should you do?

I told you at the start that I can’t give you a precise answer to that question. It is a very individual decision. As with any insurance purchase decision, you need the analyze the cost versus the risk (probability, duration, etc.) of a particular event, and the potential benefits of insurance. Then you may want to compare it to other mitigation strategies, such as “self-insuring.”

As we have seen, the problem with LTC is that we have little or no idea whether we will need it or not, or for how long.

A lot depends on a retiree’s wealth profile. For those with lower incomes and savings, LTCI will be unaffordable, so the only option will be to private pay until funds are exhausted and then rely on Medicaid.

For wealthier retirees (those with $1M to $2M in savings), accepting the risk and self-insuring may make the most sense. Those folks can afford the insurance, but they may not need it unless they want to preserve as much of their wealth as possible for their heirs.

The decision is much more difficult for couples with assets between $500,000 to $1Mil. They will have to decide between guaranteed benefits from LTCI versus the possibility of expending all their wealth at the end of life.

An alternative to self-funding is to buy a “longevity annuity” (a type of “deferred income annuity“) that begins payouts starting at age 80 to 85. An annuity has some advantages over LTCI. First, you can use the income for whatever you want. Second, unlike LTCI policies, annuity terms don’t change. And third, you don’t have to qualify or “prove” that you should receive the payments as you do with LTCI.

A drawback is that you wouldn’t have the income if you incur LTC expenses before you’re in your 80s.

What did I do?

Perhaps you’re wondering whether my wife and I have LTCI. Yes, we do.

I purchased a long-term care insurance (LTCI) policy on myself over ten years ago (when I was in my 50s) through a group plan offered by my employer. Because I purchased it when I was younger, it was reasonably priced and seemed like the right thing to do at the time. (I was still working, so it was affordable.)

Some years later, we purchased one for my wife, but it is with a different insurer and quite expensive. (I could still afford it since I was working.)

We are retired now, and these two policies are costing us a tidy sum in monthly premiums. Along with Medicare and other insurance costs, they are one of our largest monthly expenses.

I have to confess that I didn’t do a ton of research when I purchased the policies for my wife and I. As I noted above, it just seemed like the right thing to do. I knew that long-term care costs are high and steadily rising, so insurance appeared to be the right way to go.

Now that we’re in our late 60s and retired, I’m not so sure. I am going to run some different scenarios to see if I want to keep the policies. (Many people buy policies, then cancel them or let them lapse. If they do, none of the premiums will be returned.)

I may do a future post to share my analysis and my final decision.

What if you do, and what if you don’t?

As I said at the beginning, I can’t tell you whether LTCI is right for you or not.

We have seen that LTCI can be helpful, especially in some scenarios, but it will not be worth the cost for many. Also, since it has certain limits, it doesn’t actually protect us from a catastrophic worst-case event, such as spending multiple decades in LTC.

If you do…

The optimal time to buy LTCI is in your 50s, but that also means that you could be paying premiums for 30 or 40 years. Unless you spend a long time in LTC, you won’t even get your premiums back.

If you do buy a policy, make sure you understand the terms and conditions. In addition to premiums, the maximum daily benefit, and maximum time to receive benefits, are the most important.

If you don’t…

If you don’t purchase LTCI or can’t afford it, in the worst case, you will have to find a way to pay out-of-pocket should you need nursing home care. Once you run out of money, Medicaid can kick in.

Try to put a plan together to fund at least an “average” stay in LTC, which may mean preserving some of your savings for that purpose or purchasing a longevity annuity.

Final thoughts

This has been a long series about long-term care. I hope and pray it has been informative and helpful to you.

As with so many things related to retirement, it is wise to plan as though the outcome depends on us while realizing that all things are ultimately in God’s hands and so we put our trust in him. As Proverbs 3:5-6 says,

Trust in the Lord with all your heart, and do not lean on your own understanding. In all your ways acknowledge him, and he will make straight your paths (ESV).