Who Needs Long Term Care Insurance?

Long term care (LTC) insurance is designed to cover costs incurred for types of healthcare assistance for elderly and disabled persons that Medicare doesn’t cover. Typically, these are costs associated with providing support for someone who is unable to perform two or more activities of daily living (ADLs), such as bathing, using the toilet, dressing, or feeding oneself. Many people assume that the expense of securing assistance with such necessary tasks would be covered by Medicare, but they are not.

Into this coverage gap, enter the insurance companies. They began designing and marketing LTC products, and the public responded enthusiastically. In 2002, LTC policies were selling at an annual rate of 750,000. Logically, nowadays, with Baby Boomers turning 65 at the rate of 8,000 per day, you might think the market for LTC would be going through the roof. However, only about 89,000 policies were purchased in 2016, which represented a 14 percent decline from the already-sickly rate of the previous year. So, what happened?

The short answer is that insurers didn’t estimate their liabilities accurately, and this caused them to mis-price policies, resulting in losses for the insurers, followed by steep premium increases. Not surprisingly, sales fell off the table. Pricing continues to be the central objection raised by prospective buyers, especially for those whose health history leads them to wonder whether they’ll ever collect sufficient benefits to justify the pricey coverage. Additionally, with retirees living longer and longer, the potential benefit period doesn’t encourage insurers to cut rates.

On the other hand, 52.3% of people turning 65 will need long-term care during their lifetimes, according to a recent study conducted by the Morningstar, Inc. Statistically, the average length of the need for LTC for people who are 65 is two years, and only 22% of men will ever need more than a year in a nursing home. For women, the figure rises to 36%. 

How much does it cost? As with most insurance products, the younger and healthier you are when you buy it, the lower the annual premiums (but the more years you’re likely to pay before needing the coverage). Currently, the average annual premium for LTC policies is $2,772. Naturally, this varies significantly in individual cases, depending on your age and health at issue and the options and levels of coverage you choose. If you’re interested in researching premiums and types of coverage available in your state, contact your state insurance commission to find out which insurers are approved to offer LTC policies in your state. You should also check the companies’ financial stability and experience at offering LTC policies with rating agencies like AM Best, Standard & Poor’s, and Moody's. Those still employed may wish to find out whether their employer offers LTC insurance as a benefit, perhaps funded with pre-tax dollars.

One way of funding LTC coverage or expenses is through a health savings plan (HSA). If you are eligible, you can make tax-favored deposits to an HSA, and then you can make tax-free withdrawals from the plan to pay for eligible healthcare expenses, including the types of expenses covered by LTC insurance. You can also use money from your HSA to pay LTC policy premiums.

If you have questions about long term care insurance, expenses related to long term care, or other financial matters related to future medical and healthcare costs, contact your financial advisor. We help our clients address these and other questions as part of our wealth management process.

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Go to the Bernhardt Wealth Management Blog where this was first published to read this and other blog entries.

About Gordon J. Bernhardt: President and founder of Bernhardt Wealth Management and author of Profiles in Success: Inspiration from Executive Leaders in the Washington D.C. Area, Gordon and his team provide financial planning and wealth management services to affluent individuals, families and business-owners throughout the Washington, D.C. area. Since establishing his firm in 1994, he and his team have been focused on providing high-quality service and independent, unbiased financial advice to help clients make informed decisions about their money. For more information, visit Bernhardt Wealth Management and Profiles in Success.