The value of long-term care insurance is generating a fierce debate on whether it belongs in an investment/retirement portfolio.
LTCi products have endured a rough history, with early policies sold in the 1990s plagued by poor pricing models. That led to instability, with many insurers either fleeing the market, or hitting clients with exorbitant price hikes.
Today, the pricing is more cautious, but nobody knows whether the products are a good match for the ever-expanding life expectancy of baby boomers.
“Don’t buy long-term care insurance,” said Melinda Kibler, a wealth manager at Palisades Hudson Financial Group in Ft. Lauderdale, Fla. “Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance. In fact, LTCi can increase rather than reduce risk in retirement.”
LTCi is an investment that just doesn’t make sense, she added.
“It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust,” Kibler said.
Mathematics works against LTCi because most people will need long-term care eventually, Kibler explained.
“For insurance to make economic sense, the risk must be spread across a pool of participants,” she said. “With other types of insurance, only a portion of the population collects, while the others continue to pay their premiums, covering expenses paid out and keeping premiums manageable.”
Since the bulk of buyers will eventually collect, LTCi insurers will have to raise premiums, as well.
“This, in turn, will cause the healthier portion of the population to opt out, leaving a pool of less-healthy participants who all believe they will need to collect on this insurance sooner than later,” Kibler said.
'A Balanced Approach'
Instead of paying into a policy with rising premiums that may empty your retirement savings, Kibler said it’s better to plan for long-term care by saving and investing.
“The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds,” she said.
Long-term care specialists vehemently disagree with Kibler’s assessment.
“In general, it’s a great idea, and a great hedge, for people between the ages of 50 and 75 with a liquid net worth between $500,000 and $5 million,” said Lawrence Sorace, a wealth manager with Mulberry Lane Advisors in Matawan, N.J.
Not only that, but Sorace also believes that long-term care insurance is “absolutely needed.”
“Social Security is not even close to being enough to pay for the monthly cost of extended long-term care,” he said. “Medicare does not cover extended long-term care, and Medicaid only covers people who have already spent down a majority of their assets.”
Replacing long-term care insurance with a stock market-based health care savings model is a risky bet, Sorace said.
“Typically, you would need to get a 7 percent-plus return on the investment year after year to keep up with a Pacific Life LTCi policy with inflation protection.” he said.
A client could be vulnerable to market risk, he added.
For example, a 65-year-old male can get about $384,000 of long-term care coverage with a deposit of $100,000, Sorace said. By the time he is 80, his coverage would have grown to $634,000.
With a stock market plan, one would need a 10 percent rate of return, year-over-year, on an initial $100,000 investment for those 15 years.
Long-term care insurance companies paid $9.2 billion in claim benefits to roughly 295,000 individuals in 2017, according to the American Association for Long-Term Care Insurance.
Stock Market Falls Short
Some insurance specialists are more adamant that stock market savings fall way short when compared to long-term care insurance.
“Thanks to a November 2014 report from AHIP, we know how well savings performs against long-term care insurance – poorly,” said Stephen Forman, senior vice president at Long Term Care Associates in Bellevue, Wash.
Here are three takeaways, from AHIP and Forman:
• To pay for the same amount of services covered by insurance (costing $188 per month), a 60-year-old would have to set aside $1,666 per month for 22 years.
• If an individual invests the value of the average LTCi premium for 22 years, he or she would accumulate only enough to pay for six months of care. By putting the same amount into premiums, he or she could own a policy covering more than three years of care.
• Roughly 22 years of premium payments would be returned after only five months of receiving the average long-term care insurance policy's daily benefit.
Others say that many stock market-oriented money managers by nature, aren’t bullish on long-term care policies, because they could potentially thin out client portfolios, and that’s a negative outcome for money managers.
“Most money managers are not proponents of long-term care insurance,” said Nicole Gurley, founder of Gurley LTCI, in Phoenix, Ariz. “They are money managers and not
comprehensive financial planners. Their primary interest, if not sole interest, is retaining assets under management.”
That’s “quite short-sighted,” Gurley added. “What will happen to asset under management and their income when clients start liquidating assets to pay for long-term care?”
As long-term care continues to grow as a hot-button issue for aging Americans, expect this argument to grow even more heated, especially as the cost of long-term medical care continues to grow, and grow significantly.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at brian.oconnell@innfeedback.com.
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I hope for her sake that Ms. Kibler has each client sign a waiver of her responsibility when she tells them not to buy long term care insurance, because down the road, when they’re spending those investment portfolios at $10-$15K per month, their families are going to ask her why she advised against it. I’m an insurance guy; I don’t dabble in investments. I wish the investment “professionals” wouldn’t dabble in insurance.
For someone 500k – 5mil there is a good possibility they could insure themselves. But for “Middle and Upper America” I have trouble agreeing with this advise. May be too big of a risk for them!
This article has a number of issues. Most trusts do not protect assets from Long-Term Care costs nor do most people want to separate their control of their assets just to qualify for Medicaid, the medical welfare program. Self-insuring means using your own money and you would have to set aside a fairly large amount of money to do so which could then no longer be used for anything else. You would also then be subject to gains taxes when you use your own money to pay for care. The burden on family to manage your care situation would still be there as well.
Hybrid plans cost more to start and then they will return your money first when you pay for care.
This is why for most people traditional Long-Term Care Insurance makes the most sense. Plus, in most states, you have the additional dollar-for-dollar asset protection which comes with the partnership program. The policies today are priced based on the extreme low interest rate environment, low lapse rates and conservative underwriting so the chance of future rate increases is dramatically reduced.
Premiums Today are still very affordable if designed appropriately. For example, a married 54 year old male, in good health, can get a solid partnership qualified plan in Wisconsin with a major A rated company for $1126 a year. This would be $4500 a month in benefits, $175,000 pool of money both growing 3% compounded. By the time the person is age 84 they would have almost $11,000 a month available with $424,771 in tax-free benefits with the additional dollar-for-dollar asset protection offered by the Wisconsin Partnership Program. Yet the person only paid $22,520 during those 20 years.
Even with adding the cost of the wife’s policy and perhaps shared benefit rider which most companies offer, the traditional Long-Term Care insurance option is much less expensive and provides substantial amount of long-term care benefit. People can buy smaller or bigger amounts of benefits based on the amount of assets they need or wish to protect, but the object is to make a long-term care situation manageable by safeguarding assets and reducing the burden on family.
The bottom line is simple. The risk of needing care is high because of longevity. Caregiving is hard on family and paid care drains savings and impacts lifestyle. Long-Term Care Insurance is Easy and Affordable Asset Protection making your aging issues easier on your family.
I’m going to have a car accident later today. Why? It’s simple. I’ve paid premiums for many years and not one penny has been returned to me. Obviously I’m being a smart ass. If you see the need, can qualify and budget for LTC coverage, buy it. Enough excuses such as ‘what if I don’t use it?’ Buy a hybrid product that will guarantee that benefits will be paid.
We all have spare tires in our vehicles. Hopefully we don’t use them that often. Be honest—-isn’t it a major relief knowing that if/when it’s needed it’s available?
1. Having a reserve fund for lifestyle and emergency expenses is essential.
2. Reserve funds for LTC benefits are best with owning some LTC benefit. We own homeowners and auto insurance not because we want a loss for our home or auto but it is just in case it happens to us., People in states with hurricanes, tornadoes, floods, and fire are looking at their benefits to learn what the insurance company will pay.
3. Reserve funds are taxable. You pay taxes on capital gains, interest, and dividends unless it is some tax-deferred investment.
4. From experience, the first thing people think about when care services are needed is who will be responsible for caregiving and how will you pay for it. Also, where will care services begin, at home or in a care center.
5. No one has that much money in free cash flow to pay for lifestyle and care services. No matter what wealth advisors comment that you have millions in assets, it is not assets that pay for care services it is cash flow.
6. Owning an LTC benefit may be a logical and pragmatic decision, but it is an emotional decision because people want to feel safe and cared whether at home or in a care center and they wants quality surroundings and friends and family to be involved. It takes and human resources to accomplish this.
7. Comments you will read in this section if it matters that your premiums are not wasted — you may ask as a benefit rider to have premiums returned to your beneficiary if none or a portion of care benefits are paid.
Or, have the discussion about hybrid benefits which guarantee that all or whatever benefits are not used will go to your beneficiary.
There is a difference between Risk and Gambling. The Risk is you own a benefit, and you need some or none of the benefits. Gambling is hoping you will die quickly or care services will be short term, and then you die.
As my mother who owns LTC benefits and is affluent comments — “No one has that much money for both lifestyle and care benefits.”
Having the conversation about benefits does not matter — what is it important is to consider the event of needing care. What is your caregiving plan and what is your exit strategy?
I am wondering what happens to the LTC policy if the owner passes away before he/she uses it? Is there a death benefit if it is a straight LTC policy?
Not typically, no. You can buy a life policy with an LTC rider, or an LTC policy with a return of premium rider, but either of these is significantly more expensive than a straight LTC policy. People pay insurance on their homes for 60 years, and you never hear them complain about their homes not burning down, right? You don’t buy insurance hoping to use it, you buy it hoping not to need it. But with LTC insurance, everyone get’s caught up in “What if I never use it?” Well, congratulations – you remained healthy and independent throughout your lifetime – be thankful!
LTCi is vital for folks as they get older. Ms. Kibler’s nonsensical idea that people will appropriately save and invest for future potential long term care needs is both amateurish and shallow.
Advising someone not to buy long term care insurance is just plain wrong. It’s not a perfect insurance product but by far, it is the best tool to pay for devastating long term care expenses.
Based on Genworth’s latest cost of care survey, the average median cost of a semi-private room in a nursing home is $85,775 annually while the average median cost of a private room in a nursing home is $97,455 annually. These are just median rates, which means these can still go higher depending on the state where you live in.
Long term care is just one of the major retirement expenses people should plan for. According to BLS or Bureau of Labor Statistics, the spending patterns of Americans 55 year old include other retirement expenses: housing, transportation, food, pension & social security, entertainment and others.
It’s clear that long term care is an expense that should be addressed as early as possible. If not, Americans will end up spending their entire nest egg to pay for care or they become a financial burden to their loved ones. Family caregivers spend around $7,000 on average annually to help aging family members pay for their medical bills, long term care, food, utilities and more.
Buying long term care insurance today is imperative. About premiums, Matt is right when he said that premiums are affordable if you design your policy properly. Here are some things you can do to make your premiums affordable:
1. Lower your daily benefit amount
2. Shorten the length of your benefit period
3. Adjust your benefit inflation rate
What are your thoughts on IUL with ABR for Chronic/Critical Illness? What if the owner dies before LTC is even used or hardly used?
Just look at the number of carriers today with LTC coverage compared to 10, 15 or 25 years ago. That’s your answer.
Today there are 15 carriers in the Nation and only 9 do business in NC.
Carriers have abandoned the market as they can’t make the numbers work.
But there are still 9 strong carriers. How many companies sell individual disability insurance in NC? About 9. Is DI a bad idea? No, quite the contrary. Disability is a specialized product/market and after its own upheaval and re-establishment from the mid 1990s, DI has become a strong, viable, and profitable market. The number of carriers in LTCI is not the issue.
I suspect Ms. Kibler is not aware of the tax benefits a LTCi policy. Perhaps someone should let her know that it’s possible to pay up these policies in 10 years or even a single payment. And since LTCi is considered health insurance to a business, any premium paid by a business on behalf of an employee is tax deductible to the business – and benefits are received tax free. If Ms. Kibler has any clients who own their own business, she is doing them a disservice by not discussing these options with them.
Thanks all for your comments. We will be doing a follow-up article addressing many of your points.
Ms. Kilbler’s entire basis for not recommending LTCI are flat out wrong. She doesn’t understand the product at all and is a terrible source.
I would like to ask the experts out there about the assumptions used for estimating LTC needs. It is a given that the assited care of our elderly will continue to go up. When someone quotes over $600K of coverage, is that over what period of time? How long does the LTC provider estimate a client will be spending in the LTC facility? If someone with LTC policy has cancer and needs assisted living for the last few months of his/her life, what happens to the value in his LTC policy? Everyone throws around huge $ figures yet no one talks about the parameters used in their discussion. It would be nice if someone can direct the public to a definitive article that talks about assumptions and how the figures are arrived at. I am asking because I have a friend who is suffering from Stage 4 cancer and he has LTC. If he succumbs to his cancer with little suffering, his LTC policy which he has had for the past 12 years is all for not.