Should You Buy Long-Term Care Insurance?

One of the more difficult financial decisions facing those of us in middle age is whether we should buy Long-Term Care Insurance (LTCI). You’ve probably witnessed a friend or family member enter a long-term care facility only to be blindsided by the costs of extended full-time care. We don’t want to think about this happening to us or our families, but, statistically speaking, we are likely to require at least some long-term care during our lives. Ignoring the reality is leaving a huge financial risk to chance.

Should everybody purchase Long-Term Care Insurance? Not necessarily, but you should learn enough to make an informed, proactive decision. If you decide to buy a policy, you will have to choose the type of policy that is appropriate for your family and what you are willing to spend. Policies and costs vary widely based upon the benefit period/benefit maximum, inflation coverage, levels of care, shared benefits, daily/monthly benefits, and much more. The purpose of this article, however, is to help you determine whether you are an appropriate candidate for some version of managed-care insurance.

  • What about your genetic history? Conditions that require specialized care but don’t kill you quickly are the most costly. If you have a family history of dementia, Alzheimer’s’, Multiple Sclerosis, or Parkinson’s, you may be at high risk for a long stay in a nursing facility, where a LTCI policy will really be beneficial. On the other hand, if you have a family history of cancer, LTCI may not be the right choice. That’s because cancer patients have a better quality of life until near the end and are often able to remain at home with hospice care for most of the duration of the disease.
  • Is it worth the cost to you? As with all insurance policies, you are purchasing LTCI to mitigate a risk. Medicaid will pay for your care if you don’t have enough to pay for long-term nursing care, so the risk in this case is not that you’ll be left to live in the street but that you’ll die practically penniless, having spent the savings you had hoped would go to your spouse and children. The rules vary by state; click on your state, then the link “Key Medicaid Information for [STATE]”. My general rule of thumb is that if you are worth $3M+ and are willing to risk spending up to $1M or more for nursing home care, you probably don’t need to buy LTCI. Between $1M and $3M, you are in the “sweet spot” for needing some nursing home/in-home care policy. Below $1M, the price you’ll pay for LTCI is probably not worth it.
  • What are your other options? An expensive LTCI policy is not the only solution. Here are some alternatives:
    • Give away your estate at least five years before you go into a nursing home. If you are sufficiently impoverished, Medicaid will pay for the cost of your nursing home care. I’m really not a fan of this strategy, as you’ll have to relinquish control of your assets not knowing if you’ll ever enter a long-term care facility and at great risk to your personal welfare. If you are considering a decision this radical, be sure to consult with an attorney who specializes in Medicaid planning. You should also coordinate with your financial planner and/or CPA.
    • Buy an STCI (Short-Term Care Insurance) policy to cover stays of up to 360 days. According to the Center for Retirement Research at Boston College, about 50% of Americans will need nursing home care during their lives. The less-discussed statistic, however, is that the average stay for a man is less than a year and about 1.5 years for a woman. If you’re balking at the cost of a soup-to-nuts LTCI policy, STCI may be a good compromise.
    • Buy a SPIA (Single Premium Immediate Annuity), the only annuity I actually recommend. A SPIA is a very straightforward transaction: you give a sum of money to an insurance company in exchange for a monthly payment for the rest of your life. Because it’s not complex (unless you are persuaded to add expensive riders), commissions are low. Returns are low, too, but that’s not what matters. If done properly, the purchase of the SPIA converts “countable” assets into a “non-countable” income stream. In other words, the SPIA does not have to be spent down even though the spouse is in a nursing home. For those who are facing the loss of a chunk of assets to pay for long-term care, a SPIA may be the answer.
    • Exchange a taxable annuity or life insurance policy into a LTCI policy. Do you regret that costly whole life insurance policy your “best friend” sold you? Here’s a solution: the Pension Protection Act of 2006 allows taxpayers to use what is called a 1035 exchange to convert an existing life insurance policy or annuity into a standalone or hybrid LTCI policy. By doing so, you not only have long-term care coverage but the built-in taxable gain in your current policy vanishes!

The decision of whether or not to buy a Long-Term Care Insurance policy is a complicated. If you’re wondering at what age you should begin shopping for a policy, see my tips in “When Should I Buy Long-Term Care Insurance?”

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