Long Term Care Insurance - Should I Get On Board?
Long Term Care ("LTC") insurance should be evaluated carefully to determine whether it is a wise investment. Nobody wants to reside in a nursing home; but when a nursing home stay is required, how is the nursing home bill going to be paid? Three general options exist- private pay from savings, Medicare/government pays or LTC insurance policy pays. Medicare planning is a topic better left for another discussion. I will focus on the economic factors that influence whether to acquire LTC insurance.
The book Super Freakonomics discusses bizarre examples to illustrate how all people respond to "incentives." As an economist at heart, I'll use my own version of Freakonomics to illustrate whether there is enough "incentive" to justify the purchase LTC insurance. A couple examples are a good way to illustrate the economics that may guide your decision on whether to acquire LTC insurance.
First, assume that Mr. Money Bags has a $10 million net worth. What would be Mr. Bags' incentive to purchase LTC insurance? As Money Bags exclaims, "I'm not going to lose my entire fortune to the nursing home!" I've heard this type of rhetoric before. Does Mr. Bags really believe that nursing home cost will consume his $10 million net worth? Clearly, Money Bag's incentive for purchasing LTC insurance is the perceived (real or not) protection of his net worth. However, how realistic is it that Money Bags large net worth will be consumed by nursing home costs? Because Money Bags has sufficient income to pay for a lengthy nursing home stay without impacting his net worth, I suggest that Money Bags is NOT a candidate to purchase LTC insurance.
In contrast to the fortunes of Money Bags, consider Ms. Poore who has little savings and is living on a very modest fixed income. Ms. Poore proclaims, "I want every penny of my savings to go to my children and NOT the nursing home!" Ms. Poore's incentive for LTC insurance is to maintain the inheritance for her children. Does Ms. Poore realize that she will qualify for Medicare almost immediately upon entering the nursing home? Ms. Poore's incentive to acquire LTC insurance so as to pass her wealth (albeit small) on to her children is laudable. However, because Ms. Poore has a small net worth, she probably is NOT a good candidate for LTC insurance (and probably cannot afford the premiums).
When we eliminate the financial extremes like Money Bags and Ms. Poore, we are left with a large class of middle income/moderate wealth individuals. These individuals are the candidates that don't have sufficient assets to fully fund nursing home costs without potentially eroding their wealth. Typically this group also has an incentive to protect the wealth for their heirs. This is the group that should seriously consider the costs and the benefits of LTC insurance. This is where a good financial planner earns their fee. How expensive are the premiums? What are the average daily costs for nursing home? What other sources are available to pay for LTC (i.e. Medicare v. savings)? Should we acquire LTC insurance to partially fund the cost of nursing home?
A potential alternative to the expensive $200 per day cost for nursing home is to live out your days on a cruise ship. That's right, a four star cruise with senior discounts can be booked for $135 per day (only 60% of the cost of nursing home). Now that's an incentive! That leaves around $65/day for gratuities, spa, cocktails and medicine. The cruise ship will provide you with free toothpaste, razors, soap, shampoo and room service. The on board medical staff is at your beckon call. Imagine the advantages of buffets, clean linens, maid service, swimming pools for therapy, workout room for rehab of injuries and nightly entertainment. I suggest that the advantages of cruise ship LTC planning may be an affordable and more attractive option to LTC insurance.
If you have not reviewed whether LTC insurance is an appropriate option, I suggest that you sit down with your financial planner to see if the incentives justify the cost.