Should You Purchase Long-Term-Care Insurance? - Wall Street Journal

Long-term-care insurance. It's a subject most people don't want to think about—but many people know they need to.

At first blush, policies that help pay the costs of extended nursing care make perfect sense. Bills add up quickly when you can no longer take care of yourself and your needs exceed what family and friends can provide. Nursing homes, assisted-living centers and home care all are expensive, and there is no telling for how long you may need the service. Buying a long-term-care insurance policy can be a way of making sure your future physical needs will be met. Policies designed in partnership with state governments also give individuals and their families a way to protect savings in the event of burdensome care costs that stretch on for years.

Critics, however, say insurers are using scare tactics to sell their products, which come with a hefty price. For most people, these critics say, long-term-care policies are either unnecessary or cost more than their benefits are worth. They believe that a great many people would be better off essentially self-insuring or relying on government-funded programs.

Mark Meiners, a professor of health administration and policy at George Mason University, argues in favor of long-term-care insurance. Prescott Cole, a senior staff attorney at California Advocates for Nursing Home Reform, argues against.

Yes: Don't Just Hope for the Best

By Mark Meiners

Being financially ready for the possibility that you will require long-term care is an important part of retirement planning. But too many people are still preparing merely by hoping for the best.

For anyone 65 and older, the odds are not in your favor. Statistics show 70% of those who reach 65 will need long-term care. With long-term care costing as much as $250 a day, it doesn't take long to completely deplete a lifetime of savings—even if you're "lucky" enough to only need it for a relatively short period of time.

Madden Meiners

MARK MEINERS: 'The biggest misconception is that Medicare covers long-term care. It does not.'

For those who buy and keep their policy it is a no-regret proposition. No one who has paid premiums and receives their benefits from the policy regrets having paid those premiums. And no one ever regrets being fortunate enough to never need those benefits.

The sad fact, though, is that only seven million to eight million people have bought the insurance so far. The market should be at least twice that size by now. Certain misconceptions, and some wishful thinking, are holding it back.

Some Misconceptions

The biggest misconception is that Medicare covers long-term care. It does not. Medicaid, meanwhile, pays for various kinds and amounts of long-term-care services and support—for the poor. But many states are cutting back on Medicaid benefits, and access to good care is always uncertain.

That isn't to say long-term-care insurance is right for everyone. It's not. The wealthy can be reasonably sure their savings will be enough to pay directly for long-term care, whatever its duration. And despite concerns about quality, Medicaid is there for the poor.

But what about consumers with midlevel savings—in other words, most people? These consumers need long-term-care insurance the most. They tend to have too little savings to pay for even a couple of years of care without impoverishing themselves and their families, and too much to qualify for Medicaid.

Critics of long-term-care insurance argue that many who need long-term care use it for less than 90 days, and that most policies have a 90-day deductible, meaning most owners of long-term care insurance will receive no benefits. But who wants to play those odds, hoping they'll be one of the people who only need such care for less than 90 days? And the fact is that most people who need long-term care need it for at least a year or two.

The important thing to understand is that there are a wide range of policies offering different degrees of security, but all preferable to taking the chance of being financially decimated. According to estimates done by the American Association for Long-Term Care Insurance, a typical couple buying a shared policy providing immediate benefits worth $328,500 at age 55 pays an annual premium averaging $2,700. By age 80 their joint benefit has grown to $708,000 with the built-in inflation protection. Alternatively, a typical couple buying a shared policy with $219,000 of coverage could reduce their premium by about 20% to 25%. That's a viable option for those who are worried about this risk. If more coverage is affordable, buy more coverage. But some is better than none.

In theory, it's true, if a person invested $3,500 a year instead of using it to pay insurance premiums, the investment might grow enough to cover any eventual long-term-care bill. But as nice as it sounds, most people simply won't set aside additional savings for long-term-care needs. Moreover, savings of $3,500—should the need for care come sooner than expected—will pay for only $3,500 of care.

Partnership Policies

In a worst-case scenario, a person in nursing care might outlive by many years the coverage that they purchased, wiping out his or her savings. People especially concerned about this might consider so-called Partnership Policies, developed by private insurers and state governments and offered in 40 states. These plans let people qualify for Medicaid's long-term-care benefits while they still have a good amount of savings to spend on other things or leave for their family. (Normally, a person can have no more than $2,000 in savings for Medicaid to pay their long-term-care costs.)

Partnership plans that offer to protect savings of up to $100,000, for example, will pay up to $100,000 in benefits. Then, if the purchaser has savings of more than $100,000, he or she becomes responsible for their long-term-care costs until their savings are reduced to $100,000. At that point, Medicaid will take over the expenses.

Dr. Meiners is a professor of health economics and policy at George Mason University. He can be reached at reports@wsj.com.

No: The Cost Is Too High

By Prescott Cole

Buying insurance is basically gambling. You calculate the costs, risks and benefits—and hope that you come out ahead. In the game of long-term-care insurance, however, you are playing with a stacked deck.

Barbara Lipson

PRESCOTT COLE: 'Instead of buying a policy and paying premiums, the consumer could set aside savings.'

The industry touts scary statistics about the probability of ending life in a nursing home. It's not uncommon to see ads claiming "50% of all seniors will go into a nursing home," or "the average stay is two and a half years."

It may be more useful to learn that 67% to 70% of seniors who do go into a nursing home are discharged within 90 days, and that after two years, less than 6% of those admitted will still be there. Actually, out of 40 million American seniors alive today, approximately 1.5 million currently live in nursing homes, about 3.7%.

Long-term-care insurance does not compare favorably with other insurance products. Using a cost-risk-benefit analysis reveals an "inverted formula": With long-term-care insurance the costs are high, the risks are low, and the benefits are low, but with, for instance, fire insurance the costs are low, the risks are low and the benefits are high.

Homeowners-insurance premiums run from $300 to $1,000 per year, whereas long-term-care insurance averages $3,500. Compare the fact that you can insure a half-million-dollar home annually for less than $800 with what you get for $3,500 in long-term-care insurance premiums and you will see that clearly the latter is not a good deal.

The 90-Day Rule

Another important point: Most long-term-care policies don't pay anything until the person has been in a nursing home for more than 90 days. If more than two-thirds of those going into nursing homes leave before 90 days are up, it is unlikely that most consumers will receive any benefits at all.

Proponents argue that having a longer exclusionary period helps the insurers offer lower premiums. Another way to look at it is the lower premiums reflect the companies' view that their liability is reduced and that payouts are less likely on those policies. It doesn't matter if the policy costs less if you can't use it.

Does that mean long-term-care insurance is unsuitable for everybody? To some extent, it depends on their personal wealth.

For those with little wealth, a policy will never be suitable. They will be covered by the long-term care provided by Medicaid. For individuals with incomes of at least $250,000 a year and substantial savings, the smarter move might be to either self-insure or use their resources to pay for high-level in-home health care.

For mid-wealth individuals, the answer isn't so clear. The average annual premiums for policies sold to seniors run around $3,500 per year. But few—if any—policies pay 100% of the daily private pay rate, currently about $250 per day. Policies typically pay $150 a day. So, even a resident with a policy will have to dig into savings to pay the difference.

But instead of buying a policy and paying premiums, the consumer could set aside savings for long-term care. At $3,500 a year, in 20 years he or she could have $70,000 plus interest. In the statistical unlikelihood they end up in a nursing home, they could use these savings to pay the bills.

Admittedly, if a stay in a nursing home exceeds the set-aside savings, they will be worse off than if they had long-term-care insurance. On the other hand, if their stay doesn't exhaust their savings, they will have kept their money and done better than if they had insurance. It's a risk either way.

Unprofitable Partnerships

Some proponents tout Partnership Policies as a good solution for mid-wealth consumers, because they allow purchasers to retain more than the usual amount of savings and still qualify for Medicaid to pay their long-term-care costs. But before buying one of these policies, consumers need to ask two basic questions, "How long do I need to be in a nursing home before I can qualify for Medicaid?" and "Do I really want to end up on Medicaid?"

Indeed, getting onto Medicaid may be a phantom value. Even if a Partnership Policy holder were to survive in a nursing home long enough to shield their assets, would he or she really want to give up their private room to spend their remaining days in a Medicaid ward?

Buying any insurance can be considered a gamble. But with long-term-care policies, the high cost and the low probability of qualifying for benefits add up to a losing bet for most consumers.

Mr. Cole is a senior staff attorney at California Advocates for Nursing Home Reform. He can be reached at reports@wsj.com.