Seriously! You Hope You’ll Need Long-Term Care?

Help me out here. Do you buy insurance hoping you will use it? Really? Most of us don’t. We buy insurance to offset risk. The premise being we pay a small amount to offset large or catastrophic expense.

Unlike other insurance products — auto insurance where we see roughly one claim in 300 policies or homeowner’s insurance where we see one claim in 1300 policies — with long-term care insurance we see a ratio of greater than one in two policies.

In fact, many industry pundits refer to long-term care insurance not as a risk management strategy but an expense transfer strategy.

The federal government projections are that by age 65 and older, 70% of us will experience a long-term care event in our remaining years. The risk is significant!

If you doubt the government projections, visit the Alzheimer’s Association website: www.alz.org.    It’s sobering.

Every 66 seconds an individual age 65 or older is diagnosed with Alzheimer’s. The average years an Alzheimer’s patient lives after diagnosis is nine years.

We buy insurance to offset risk

So why do we often hear the “use it or lose it” objection with standalone long-term care insurance solutions?

In part, this objection has fueled the increase in hybrid or asset-based long-term care insurance products – life insurance or annuity based designs. The thought behind these products is that if care is never required the premium comes back to the policyholder’s estate in the form of a death benefit or cash value.

But in an apples-to-apples comparison, hybrid products are more costly than standalone products if the policyholder needs care. They are less customizable and many of the hybrid designs require a hefty single premium that puts these options out of reach of many Americans.

One way to view the use it or lose it objection is that if you never need care the cost of your long-term care has just been the cost of your insurance premiums which will always be less than the cost of care.

As one financial planner we work with sums it up, “Better to have and not need than to need and not have.”

Insurance premiums will always cost less than the cost of care

We also hear the objection that long-term care insurance is too expensive. It shouldn’t be. We ask clients to think about two factors as they explore insurance as their long-term care funding option.

The first factor to consider is how much risk (expense) you really need to offset. Years ago people bought 100% coverage for lifetime with a 5% compound inflation rider. We now know through claims history that is over-insuring for about 80% of policyholders.

Recent claims history reports that 59% of long-term care insurance claims last longer than one year. The average duration of those claims is 4.2 years – a bit longer for gals and a bit shorter for guys. About 17% last longer than five years and these tend to be claims that are associated with dementia.

The other factor to consider is a premium budget. What can you afford? Or, what are you willing to pay for this insurance?

The National Association of Insurance Commissioners recommends that a long-term care insurance premium should not exceed 7% of annual income. We use this as a guideline but other factors impact premium like age, health history and income.

Part of the “too expensive” objection is premiums can increase

We have seen sizable premium increases on old legacy policies, primarily those sold prior to 2000. The Society of Actuaries recently published a study on long-term care insurance pricing.

It concluded that policies sold today have less than a 10% probability of a rate increase over the life of the policy. And, increases would be less than 10%.

In part, this is because products in the market today are designed with higher profit margins which enable a carrier to absorb more claims than projected and still be profitable without petitioning for rate increases.

Yes. The new product designs have resulted in higher premiums to new applicants. But people are buying smarter today. We see many clients opt for a three-by-three plan once they evaluate risk offset and premium budget.

That’s a benefit amount of $3000 per month with a three-year benefit period and 3% compound inflation. We include a shared rider when couples apply together which combines the three-year benefit periods to six years for the couple to share.

This level of coverage can offset about 4.5 hours of home care a day and roughly 80% of the national median cost of a one-bedroom apartment in an assisted living community.

It’s the #1 fear but only 20% have done any planning

Not having enough money to pay for care is the greatest fear adults have about aging and their long term care needs, according to a recent consumer survey by Genworth Financial. But only 20% have taken any action toward financing their long term care expenses.

The new norm is “some is better than none.” Some coverage will offset considerable out-off-pocket expense.

Better to have and not need than need and not have.