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The Worst-Case Scenario – Is Lifetime LTC Insurance Worth It?

Luckily, you aren’t going to need years and years of high cost long-term care. But what if you did?

Like a reverse lottery, there are some people who do require long-term care that lasts a long, long time and can costs hundreds of thousands of dollars – even cracking the million-dollar mark. The odds of this happening are low, and the average person will not need this level or length of care.

As a financial advisor helping someone plan for long-term care, it is very hard to predict the future cost and duration of nursing home, assisted living, and home health care. The daily or monthly cost of care is difficult enough to estimate – not to mention the expected duration of care!

The first complexity is estimating the cost of care. Currently, the common practice is to design a plan based around the cost of home and assisted living care instead of nursing home care. The reason – a majority of LTC claims now start at home or assisted living.

Several sources give updated long-term care cost data. An excellent version is available from Genworth and can be found at genworth.com/costofcare. For 2017, the survey shows that the average national cost for home health care is $170 per day, increasing at a five-year annual growth rate of 3.08%. Many experts think that cost trends in care, such as a labor shortage due to immigration restrictions, an aging population, and less money from government sources will have costs increasing in the future.

After estimating the monthly cost of care, our next challenge is to determine the duration and odds of needing care – a much harder number to predict. One guidepost is to look at actual carrier experience. According to the 2017 Broker World Milliman LTCI Survey, the average carrier claim amount since inception is $37,000 for home care, $42,000 for nursing home care, and $68,000 for assisted living. Before someone plans for that amount, he/she needs to consider a few things. First, some claimants may have received benefits in more than one location – going from home care to a nursing home, for example. In addition, about 15% of the claims are still open. Finally, remember statistics classes and don’t confuse “average” with median – many, many LTC claims are for a brief period of time and bring down the average claim number.

Another source for predicting the odds and duration of care are from academic and government research. In 2005, a study by Alliance for Health Policy showed that of the people turning 65, 79% of women, 58% of men, and 69% of all ages will need care. The average number of years of care is 3.7 years for women, 2.2 years for men, and 3 years over all. However, the same study showed almost 28% of women and 11% of men would need care longer than 5 years.

What do other sources of information tell us about the likely spending on long-term care? A more recent study was led by Michael Hurd and Susann Rohwedder of the RAND corporation. In studying this topic they state the obvious: “Reliable estimates of the lifetime risk of nursing home use and of the associated out-of-pocket costs are important to individuals and households in deciding whether to purchase long-term care insurance and how much to save.

The study focuses on nursing home care only and what the expected costs would be for someone between the ages of 50 and 55.  Although most people who enter a nursing home only spend a few days, 10% will spend an average of 3 years, and 5% will spend over 4 years in a nursing home.  The out of pocket costs (not counting care covered by Medicare or Medicaid) for that tail risk can be substantial – over $150,000.

Now let’s consider options for planning for care through LTC Insurance by comparing the premium costs for unlimited duration coverage versus coverage that has a benefit limit. We will look at two products – a traditional standalone product and a Hybrid Life/LTC plan, both with annual pay premiums, and both policies are sold by Mutual insurers with strong financial ratings.

For the purposes of this comparison we’ll look at a 50-year-old couple. They are looking for an initial care benefit of $5,000 per month increasing at 3% compound inflation. (We picked those benefits based on the cost of care survey data mentioned above.)

First, a look at the LTC Insurance premiums for a capped, yet substantial, benefit.

 Standalone Coverage Hybrid Life/LTC plan
Initial Monthly LTC Benefit (each) $5,100 $5,000
Monthly LTC Benefit at age 85 (each) $10,367 $10,163 (for rider)
Initial LTC Benefit Pool (combined) $496,400 $500,000
Age 85 Benefit Pool (combined) $995,256 shared $758,198 (shared – initial ADB doesn’t inflate)
Annual Combined Premium $3,023 $5,992

Now, consider similar monthly LTC benefits with a lifetime benefit period.

Standalone Coverage Hybrid Life/LTC plan
Initial Monthly LTC Benefit (each) $5,100 $5,000
Monthly LTC Benefit at age 85 (each) $10,367 $10,163
Initial LTC Benefit Pool (combined) Unlimited/Lifetime Unlimited/Lifetime
Annual Combined Premium $4,572 $6,671
Percentage increase for lifetime benefits 51.24% 11%

A couple of things to point out, first, the hybrid Life/LTC premiums are more expensive than the standalone LTC coverage because hybrid plans include things such as a life insurance benefit, guaranteed premiums, and potential cash surrender values.  Our comparison here assumes that someone goes on claim at age 85, which will accelerate the death benefit and reduce any cash value quickly.  Of course, for someone who never uses the LTC benefit, the hybrid plans offer a death benefit to beneficiaries. (More on the choosing between standalone and hybrid plans).

Secondly, the percentage of premium difference for the standalone coverage between a limited benefit period and lifetime is greater than that of Hybrid Life/LTC plans.  Again, this makes sense since all the premium on the standalone coverage is geared towards the LTC benefit versus the Hybrid products.

Does the premium difference make sense in these scenarios?  It depends. For the standalone option, because our hypothetical clients are buying when they are relatively young (50 years old), the automatic inflation included will increase the benefit to almost a million dollars by age 85.

A good rule of thumb for premium affordability for a 50-year-old couple, often faced with competing priorities such as paying for college and saving for retirement, is to pay about 2% of their annual household income on standalone LTC premiums.  If a couple has a household income of $150,000, then our proposed $3,000 annual premium is right in line.  On the other hand, if the client has a household income of $250,000, it might make sense to pay the higher premium for lifetime coverage. For people who buy policies later in life, they will probably need to adjust the percentage of their income higher for LTC premiums.

What about the Hybrid Life/LTC option? For this particular carrier, it is a fairly small premium increase to add the lifetime benefit option. Although many carriers no longer offer the lifetime coverage option, there are some carriers that are still comfortable making these plans available.

Unlimited benefit options are not inexpensive and probably more suitable for younger, more affluent buyers.  However, they can provide great peace of mind for an uncertain future.

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