With the stock market high and profits generous, some Long-term Care Insurance (LTCI) vendors are suggesting that investors take money out of the market and buy the insurance they offer. Though it is true that this might be a good idea for specific groups, for others it is not what they think nor will it be worthwhile.
With the stock market high and profits generous, some Long-term Care Insurance (LTCI) vendors are suggesting that investors take money out of the market and buy the insurance they offer. Though it is true that this might be a good idea for specific groups, for others it is not what they think nor will it be worthwhile. This is why.
According to one AARP sample plan (see below), the daily benefit is $150 dollars which may or may not be adjusted for inflation. There is a 90-day waiting period which means the first 3 months are not covered.
SAMPLE PLAN: Single Person Rate Daily Benefit Pay Out: $150 a day Benefit Period: 3 year Elimination Period: 90 day Health Rate: Standard Inflation Protection: type indicated No discounts. No riders. Premiums may be different for your specific age, health, benefits, marital status, or state of residence. Age - C = 3% Compound Inflation Protection Age - X = No Inflation Protection
The annual premium is $ 2,200 at 60 years of age, $3,000 at 65 and $4,200 at 70 for a male if the C option is chosen. For women, the comparable figures are $3,300, $4,500 and $5,300. The premium is more for women than men because their life span is longer.
This means that for a couple 60 years of age, their combined annual premium is $5,500 though there is a reduction of up to 30% if the 2 apply together. Taking the maximum discount, the initial sum is $3,850 per year. However, this is anything but the long-term cost.
Let’s say the couple pays the company $3,850 annually for the first 5 years and $5,250 ($7,500 discounted by 30%) for the following 5. This totals $19,250 (initial 5 years) and $26,250 for the subsequent 5. The total payment over 10 years is conservatively $45,500 because premium hikes are not taken into account. This continues until death at a higher premium making the total payment to the insurance company potentially well over $100,000 if the buyer lives another 10 years. This is whether or not the benefit is needed.
Now here is the clincher. The payment from the LTCI Company for the 3-year period after 90 days is $150 per day X 365 days X 3 years (taken from our example). This adds up to $164,250 not adjusted for inflation (because the figure would change depending on when the LTCI is tapped). This $164,250 is not a great deal in benefit compared to what is paid into the company. Further, it is a modest figure that could need further supplementation from other family funds. This is because the $150 payment is below the national average daily cost for a single room in a nursing home which is $222 and $200 for a double.
My point is that some people are buying what they won’t need or it will not be enough even if they are able to use it. Prescott Cole, a lawyer with the California Advocates for Nursing Care Reform, gives some chilling statistics in this regard. He said in a 2012 interview published in The Wall Street Journal that of those seniors who go into a nursing home, two-thirds stay for less than 90 days. This means they would receive no benefit from the sample policy. Also, according to Cole, only 4-6% remain in nursing homes after 2 years. Thus, merely 1 in 20 who purchase a sample policy receive a prolonged benefit from it.
There is an alternative for middle and upper class families. For those that have $164,250 in liquid assets aside from core living expenses for retirement, LTCI is likely not necessary (using the figures from the sample plan). The invested $164,250 would increase in value with the stock market. This could compensate the same long term care as the sample plan, but if it was not needed, it could be used for other expenses or for enjoyment.
In summary, there are many types of LTCI. The offerings are complicated and confusing. Whether a particular choice will benefit the buyer depends on whether or not she understands it plus other factors, some of which cannot be controlled. What I am suggesting is that at least some of the time when LTCI is sold, it is purchased more because the seller is convincing rather than because it is really needed.
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