Do the Numbers Add Up for Long-Term Care Insurance?

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Long-term care is expensive and frightening to think about. But that doesn’t make long-term care insurance the right way to deal with it.

Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla., has one thought on the matter: “Don’t buy long-term care insurance.”

Kibler notes that long-term care is a big financial risk, but that long-term care insurance premiums may only increase in retirement. Unlike insurance designed to protect your home in case of a fire or your car in case of an accident, Kibler points out that long-term care insurance covers medical costs that are almost inevitable.

With other types of insurance, only a portion of the population collects, while the rest continue to pay their premiums, covering expenses paid out and keeping premiums manageable. Math works against long-term care insurance because, since most people will need it, the risk isn’t spread out across a big enough pool of participants.

“Long-term care insurance is an investment that doesn’t make sense,” Kibler says. “It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust.”

A recent study by the U.S. Department of Health and Human Services estimates that more than half of Americans turning 65 will eventually require some form of long-term support services. Yet the majority of us underestimate our risk of developing a disability that requires long-term care.

The cost of that care can’t be overestimated, either. According to insurance provider Genworth, the median cost of homemaker services — which help with household chores that can no longer be managed alone, including cooking, cleaning, and running errands — is $20 an hour nationwide. If you have to hire a home health aide for various personal needs that fall just shy of medical care, the median rate charged by a non-Medicare certified, licensed agency is also $20 an hour. Adult day health care (ADC) — which provides social activities and outings, but also may include personal care, transportation, medical management, and meals — clocks in at a median cost of $69 a day.

And that’s just at home. Assisted living facilities (ALF), which provide personal care and health services just short of those offered in a nursing home, come at a median cost of $3,600 a month. Nursing homes that provide personal care assistance, room and board, supervision, medication, therapy, rehabilitation, and 24-hour on-site nursing care start at a median cost of $220 per day for a semi-private room. That’s just over $80,000 a year at its median cheapest, and more than $91,000 if you want some privacy.

Investment firm UBS found that even wealthy investors have a difficult time gauging the cost of long-term care. After surveying 2,028 people with at least $1 million (including 475 with at least $5 million), 73% say getting sick is their top concern, while 43% worry that no one will take care of them. Yet just 50% have factored healthcare costs into their overall financial plan, while only 23% have saved for their future care.

“Maintaining self reliance is important to the vast majority of investors,” said Paula Polito, Client Strategy Officer, UBS Wealth Management Americas. “Having a plan in place for long-term care before they actually need it will help them avoid burdening their children.”

But the numbers don’t necessarily support long-term care insurance as a solution to those healthcare concerns. The average cost for long-term care insurance for an individual at age 55 is $2,007 a year, with a benefit of $164,000, according to the American Association for Long-Term Care Insurance. For a couple, it’s $2,466 per year combined, with a payout of $164,000 each. Over age 60, it’s $3,381 a year with a $164,000 initial payout.

While the benefits rise because of a 3% compound inflation growth option, Kibler asserts that the eventual rise in premiums for older buyers makes it burdensome. She warns that this can cause healthier buyers to opt out, leaving a pool of less-healthy buyers.

“Instead of paying into a policy with rising premiums that may empty your retirement savings, it is better to plan for long-term care by saving and investing,” Kibler says.

Out of curiosity, we took that $2,007 annual cost of individual long-term care insurance and used it as the initial investment in the Securities and Exchange Commission’s Compound Interest Calculator. We put it in a fund pegged to the S&P 500, used the 11.6% average growth of the S&P over the last 30 years, set up a $167.25 monthly payment ($2,007 a year) and kept it up for 25 years (let’s say age 40 to 65). With annual compounding interest, we ended up with $282,862, or nearly $120,000 more than the initial long-term insurance benefit. Even assuming a more modest return of 7% would yield $146,975, nearly as much as the insurance benefit itself – with a lot more flexibility.

While that money will come in handy if you do require long-term care, it’s also available for other retirement needs or to hand down to heirs if you remain healthy. If you don’t see help from Medicare or Medicaid in your future and aren’t independently wealthy enough to pay for long term-care, investing money specifically earmarked for long-term support services is one of the better options available.

“The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds,” Kibler says.

You could try strategies like gifting money to your adult children so you’ll be eligible for Medicaid, but there are problems with that. Medicaid looks back at assets you gave away for up to up to five years. If you apply for Medicaid within that widow, you’ll pay a prorated penalty based on the cost of care in your area.

Even if you give away assets beyond that five-year period, Kibler recommends setting up an irrevocable trust to protect them. Without it, those assets could be lost if your child is hit with a divorce settlement, is sued, or falls into deep debt.

“A lifetime of savings could be lost quickly,” she says.

Finally, if your goal is to leave money to your heirs, consider buying a life insurance policy instead. It won’t necessarily help you with the cost of care, but it’s there even if you deplete your long-term care savings and will be of more benefit to your loved ones than long-term care insurance that ends with you.

“Life insurance is a good way to leave assets to survivors,” Kibler says. “It’s more predictable and has more reasonable costs than long-term care insurance.”

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