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One way to plan is to purchase long-term care (LTC) insurance, but premium costs can be a financial burden for middle-income families. What if you took the same money you would pay for premiums and invested it yourself – that is, what if you self-insured for the possibility of requiring long-term care?

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Long-Term Care Insurance vs. Investing to Self-Insure

Long-Term Care Insurance vs. Investing to Self-Insure

 

            Long-term care costs can devastate a family's financial well-being if not appropriately planned for. Indeed, the greatest threat to the financial security of middle-class families is not that old shibboleth of the so-called "death-tax."  Rather, it is a "granny tax" on long-term health care.

 

            There are 101 million U.S. households.  Of this figure, less than 1-2 percent will ever be faced with an estate tax issue.  However, the other 98-99% are at risk of total loss of everything they own through a confiscatory "granny tax" due to long-term care costs.  The following is a break-down of the "wealth" held by the 101 U.S. households:

 

 

Number of Households (millions)

Wealth

8.1

More than $500,000

10.1

$250,000 to $500,000

19.5

$100,000 to $250,000

63.3

$ -0- to $100,000

 

 

            One way to plan is to purchase long-term care (LTC) insurance, but premium costs can be a financial burden for middle-income families. What if you took the same money you would pay for premiums and invested it yourself - that is, what if you self-insured for the possibility of requiring long-term care?

 

            A recent study came to startling conclusions.  First, one should understand a bit of background information.

 

            The recently enacted federal Deficit Reduction Act (DRA) and the devastating consequences it will have for middle-class families is largely attributable to the lobbying of the long-term care industry.  Prior to DRA, it was possible for middle-class families to transfer their assets and still qualify for financial assistance for long-term care.  They were able to do so because the resulting penalty period (i.e., period during which an elder was disqualified from receiving financial assistance) had often expired by the time the application for assistance was made.  With the passage of the DRA, the penalty period does not begin until the person is out of money to pay for care.

 

            Prior to the DRA, sales of long-term care (LTC) insurance had not matched predictions.  With the lobbying of the LTC industry and the passage of the DRA, it is now anticipated that there will be an increase in the purchase of LTC insurance policies.  This is due to the DRA requirement that people be able to sustain a five year look-back period rather than the pre-DRA look-back of three years.  This assumes, of course, that such people are insurable and can afford the premium for five years of coverage, which will be higher than a premium for three years of coverage.

 

            It has been this writer's opinion that LTC insurance generally should be considered as a planning tool for individuals of modest means who cannot otherwise sustain themselves during a penalty period due to a transfer of assets (for example, putting a child's name on a deed or a bank account).  In many cases, however, middle-class elders will find the premiums on such LTC policies to be prohibitively expensive.  Where the elder is still healthy and has no pre-existing condition which renders them "uninsurable" according to LTC underwriting standards, the decision will likely come down to a decision between paying these higher premiums for LTC insurance or paying privately for long-term care in a nursing home for two additional years (if nursing home care is ever needed).

 

            Now to the results of that recent study on LTC insurance vs. self-insurance through investment.  The study indicates that LTC insurance may be a good buy for women who are insurable and can afford the premiums.  On the other hand, the same study indicates that older men are financially better off by investing the sums that they would otherwise pay in premiums for LTC insurance and using the investments to self-insure in the event an extended period of long-term care became necessary.

 

            Researchers at the University of Southern Maine conducted a study to determine just how financially desirable LTC insurance is compared with self-insuring. Specifically, they looked at the financial feasibility of making annual insurance payments to cover nursing home care for up to $4,000 a month for a maximum of five years. They estimated these payments to be $1,190 for someone beginning to pay at age 40, $1,867 for an individual starting at age 55, and $3,322 for someone starting at age 65. The researchers compared the purchase of insurance with the opportunity cost of investing the required funds at three different rates of return.

 

            Although the results varied depending on how the average length of a nursing home stay was determined, the researchers found that in general LTC insurance appears to be "quite desirable" for women but only moderately so for men. This is because men pay the same premiums but have a lower probability of needing nursing home care and have shorter average stays than do women. The greater the return on investment, the more desirable self-insuring became for men. And the study concluded that self-insuring is the more desirable alternative for older men (age 65) at any of the three levels of investment return.

 

            The researchers note that substituting higher 2006 premium quotes made the purchase of LTC insurance even less desirable for some males. But they also cautioned that their analysis did not account for tax breaks that purchasers of LTC insurance would receive.

 

            The study appears in the online edition of the Journal of Financial Planning at http://www.fpanet.org/journal/articles/2006_Issues/jfp1106-art7.cfm.

 

            One criticism of the study I would have is that the study focuses on nursing home care.  Much care is provided at home or in assisted living facilities, which can be covered under many modern LTC insurance policies.

 

            Richard Habiger is an Elder Law Attorney. He may be contacted at 618-549-4529 or Richard@HabigerElderLaw.com.

 

 


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