Personal Finance: Conundrum of long-term care for those 65 and above

What is the fastest-growing age segment of the U.S. population? Answer: 85 and above. That is great news, but it raises issues as well, including the need to cover expenses of long-term care as we live longer.

According to the U.S. Department of Health and Human Services, 70 percent of Americans over 65 will require some level of long-term care during their lifetimes. As with Social Security and Medicare, an older population with a longer life expectancy presents significant financial challenges for the provision of living assistance beyond the scope of primary medical care.

Responding to growing demand, insurance companies launched a wave of offerings throughout the 1980s and ’90s that proved to be both popular and unprofitable. Actuarial assumptions underestimated the eventual claims experience and the fraction of customers who allowed their policies to lapse, creating huge losses and a mass exodus from the market. 150 companies sold LTC policies in 2000; today only 15 do. Meanwhile, premiums have surged as benefits have been pruned. The Cadillac plans of two decades ago are beyond reach for most consumers, and many middle-income folks face the dilemma of how and whether to insure against the growing risk of a financial wipeout.

As with any insurance consideration, start with an assessment of potential risks to be covered. When buying homeowners’ coverage, it is theoretically possible to insure against any potential hazard. But some risks, while insurable, are less likely to materialize, and so the owner of a mountaintop cabin may forego the cost of flood insurance. Similarly, likely risks of long-term illness vary by individual.

Assessing your current health status and family history of longevity can provide a baseline for coverage limits. Policy benefits can be tailored to the highest probability outcomes in your specific case, including length and amount of benefits, deductibles or elimination periods (length of time before payments kick in).

A general knowledge of average risks also can help. Although the odds of a long-term care need are high, the average duration is shorter than many people assume. According to HHS data, about half of all paid care for long-term needs extend less than one year. A Center for Retirement Research survey found that the average nursing home stay for women is 17 months and just 11 months for men. These numbers suggest that playing the higher odds could allow you to tailor a policy that covers the most likely outcomes but doesn’t break the bank.

Given the lower probability of a lengthy need, one alternative is a short-term care policy. A typical option pays benefits for one year, starts making payments on day one, and pays out in addition to any Medicare benefits (unlike longterm care policies, which kick in after Medicare stops). These products may also be easier to qualify for given certain health conditions.

Another option growing in popularity is a hybrid policy: an annuity or life insurance contract that allows acceleration of death benefits to cover long-term care expenses. But beware: these products are generally poor investments because of their high expenses and opportunity costs, and should be considered carefully with the help of a financial planner.

If expenses deplete your assets, you eventually will need to sell the house before Medicaid kicks in. So it may make sense to consider a reverse mortgage as a last resort. Again, trusted counsel is critical, but your home is a valuable asset and it may be better to control its disposition yourself.

Long-term care expenses pose major risks to our financial well-being, but assessing, segmenting and insuring the most likely ones can significantly improve the odds.

Christopher A. Hopkins, CFA

Vice President and portfolio manager
Barnett & Company

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