Long-Term Care insurance versus other types of insurance.
of insurance the reason to insure for a specific incident is because if that event were to occur it could have a significant financial cost and could be detrimental to the family. Yet, when Long Term Care insurance is considered, the opposite reasoning is utilized: It may not occur, or you will most likely have enough money to pay for it. The major difference between long-term care insurance and other types of insurance is the burden the event places on the family and the chances of the event occurring.
I am often told by people who decide not to purchase a long-term care insurance policy that they have chosen to “Self-Insure”. Often it is used in a sentence like this: “My Financial Advisor has recommended that we do not need Long-Term Care insurance and instead Self-Insure.” In reality it has nothing to do with insurance but paying for care out of pocket. A better term would be self-fund. Often the under lying factor is “I can’t imagine this occurring”.
The reasons to purchase an insurance policy are similar; much focus is placed on the financial burden an event will cause. What differentiates Long-Term Care (requiring care for at least 90 days) versus other life events is the likelihood that care will be needed, and the length that this event will affect the patient and their family. In most cases, Long-Term Care is not one single event from which you can quickly recover, but a long-term ordeal that can have lasting effects on the family.
Contrast Long-Term Care insurance with other types of insurance, for instance a Term Life insurance policy. The reason most often sighted to purchase a Term Life insurance policy is to protect the family from the financial burden that their unexpected death would cause. Term life insurance is the most popular form of life insurance. Most people with a family own some type of life insurance and most often it is Term. There was a study in 1993 by Penn State that determined only 1% of all Term Life insurance resulted in death claims. Your age and health will tip the odds one way or the other. For instance a healthy older person would more likely attain the age of 65. Ironically, of those people that reach the age of 65 there is a 50/50 chance that a person will need long-term care at some point in their life and the odds of needing care increase as a person ages. We also know that of people who reach the age of 65 there is a 1 out of 10 chance that a person will need care longer than 5 years. Yet many people still believe that purchasing a Long-Term Care insurance policy is not worth the expense because it may not occur.
How would this thought process fair with other types of insurance? Could you imagine not having full coverage auto insurance because there is only a 1 out of 100 chance of being in a car accident that totals your car? How about not having homeowners insurance because there is only a 1 out of 1,000 chance that your house will have substantial fire damage?
The other argument against long-term care insurance is the cost of care. Many will profess an average number. For instance: The average length of care is only 2.9 years at $100,000 per year. That’s less than $300,000. Thus this is what care will likely cost, and I can afford that amount. What people fail to consider is the average is a number based on finding the middle from a high to a low. For every person who required minimum care for a short period of time, there was a person who required round the clock skilled care for 6 years. Consider determining how much insurance coverage a person should purchase based on the averages? The average cost of a car, the average price of a home, the average price of an operation.
A couple other numbers I often see used incorrectly are the cost of home care and the future cost of care. The cost of home care is usually based on 40 hours per week of care. Why is this number used? 40 hours of paid home care may be enough but who will be tasked with providing care the other 128 hours of the week? What about never considering inflation into the future costs of care? The inflationary cost of care has typically fluctuated between 2 and 6 percent annually. However, most analysis I have read do not address the baby boomers flooding the care industry? The economic law of “Supply and Demand” dictates the inflationary cost could be a higher number. In comparison, would it be prudent to purchase a home insurance policy but never increase the coverage as the home replacement costs increase?
In financial planning a scenario analysis is often used to determine a best case and worst case scenario as a range of Return on Investment. Why is the worst case scenario not considered in planning for long-term care? What is the financial benefit of not protecting one’s family or client from an event that is more likely to occur than most other types of events we commonly insure against? While the odds of needing care for a year is more likely to occur than those needing care for 10 years, a more realistic scenario of what could be required should be considered. The reason for insurance is not to cover what is likely to occur but rather to alleviate the burden of what could occur and the consequences of this event.
The issue with long-term care is that there is not a concrete answer to what care will cost and what would be required? Where care is provided, the level of care and the facility create large variations in the cost. Most people cannot imagine being in a situation that would require years of care, but the likelihood of needing 6 years of care is much higher than the chance of passing away before the age of 65. 6 years of care could easily cost more than $600,000 today and in 20 years double that number. It is easy to say “We have plenty of money to pay for long-term care” and sweep it under the rug. The elephant in the room is “at what cost?”
In order to analyze the burden that a long-term care event could cause one must begin by asking who would the event impact? Not only for the patient and caregiver but how would it effect those tasked with managing the care, the finances, and the family in general. When care is required there are many questions that could require the assistance of an accountant, attorney, financial professional and a care manager. There could be unexpected expenses and taxes. Long-Term Care insurance can help to alleviate or simplify some of the issues that will need to be solved and remove a heavy burden from the family.
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