Does long-term care insurance solve the long-term care needs for your client? Does it help or hurt your client?

Will long-term care insurance solve all the client's long-term care needs?

In short, no. 

Besides the issue that less than half of the United States population is not insurable at all or at standard rates, and besides the issue that certain long-term care needs are not covered by long-term care insurance (such as only needing help with one Activity of Daily Living), this blog discusses the question of whether the purchase of long-term care insurance helps or hurts your client.

 

A few background comments: It is safe to say that the long-term care insurance industry is in a state of transition.  Many companies have stopped writing new policies.  Most companies that have blocks of in-force business have raised, and continue to raise premiums on previously issued blocks of business.  One major writer of long-term care insurance is now in liquidation due to their liabilities greatly exceeding their assets, and their policies have been taken over by State Guaranty Associations. 

 

The companies that continue to issue policies have, in response to low market interest rates, lower lapsation of policies than expected and other factors have tightened underwriting requirements, raised prices and introduced prices that differ by gender.  On the positive side, helped in part by tax law changes, new forms of long-term care coverage have emerged, such as long-term care riders on life insurance policies.

 

Much discussion and spirited debate over the pros and cons of long-term care insurance has taken place.  But with all this, there is the critical question I alluded to earlier and until now has yet to be answered:  How does the purchase of long-term care insurance affect the probability of a retiree successfully meeting the all-important retirement goal of not outliving assets? The answer is coming in an article (I’ll let you know where it will be published) that investigates this issue in detail and a future blog on how you can get the answer for your clients.  For now, I’ll just summarize the results for a hypothetical male aged 65 who is insurable and has a portfolio of $600,000 (yes, asset portfolio size matters in this analysis, and matters even more in the whole analysis of retiree long-term care costs).

 

The short answer is  - it's complicated!:

 

The purchase of long-term care insurance reduces the probability of this sample retiree successfully meeting the all-important retirement goal of not outliving assets.  But the amount of reduction is small.  Typically, if the chance of success is, say, 87% without the long-term care insurance, the chances reduce to 82%.  However, there are advantages to the purchase of long-term care for this sample retiree that may outweigh this calculation:

 

1.       An important measure of whether the purchase is appropriate is the possible range of costs the retiree may incur for the possible long-term care needs over the retiree’s lifetime.  There is about an 80% chance that the present value of these costs will be higher if the long-term care insurance policy is purchased (due to the premium payments, of course).  However, the difference in the present value (compared to not purchasing the insurance) is relatively small.  For the 20% of the time that the present value is smaller with the purchase, the difference in that present value is potentially huge.  Another way to state this is that if the client buys the insurance, he accepts a relatively small additional cost for long-term care costs over his lifetime, but protects against higher, potentially catastrophic long-term care costs (which really is what insurance is all about).

2.       If and when long-term care is needed, the insurance company can send someone out to visit the client, and help with assessing the need for long-term care services and with pointing the client in the right direction.  This is a great service for the client at a very stressful time.

3.       In certain locations in the United States, an assisted living facility may review the client’s financial situation before admittance.  This review may take time and add stress.  If the client has a policy, the review is often waived.

 

Note that this short answer is only for the hypothetical case mentioned above.  Different retiree profiles lead to possibly different conclusions.  It is necessary to tailor this analysis to the specifics of your client!