“Do you think long-term care insurance is right for me?” It’s a question that many clients have asked me.
I don’t sell long-term care insurance, and although I have some knowledge on the subject, I would not call myself a long-term care insurance expert. What I do know about long-term care insurance, I think it’s a good product, but the cost scares my clients and that cost may be increasing dramatically in the future.
One of the main reasons that I believe long-term care insurance is a good product has to do with the fact that I believe many elderly people will require long-term care and will, if they purchased long-term care insurance, use the insurance. But the frequency with which long-term care insurance is used may be the downfall of the product.
Long-term care involves several forms of care. Care in a nursing home is a type of long-term care. Assisted living residences provide long-term care, as well. And there are home health aides, people who come to your home and provide care to you.
With all these different forms of care, many elderly people are receiving long-term care for—well—a long-time. Gone are the days when people might go to a nursing home for a few months before they died.
Many people move into senior communities, or adult communities, when they are in their mid-50’s. In their 70’s or early 80’s, people may begin receiving the services of a home health aide. Perhaps a few hours a day, several times a week at first. Eventually, they may require the assistance of a live-in aide. Finally, the person may move to a nursing home, where he may live for several years.
Long-term care is very expensive. A home health aide can cost between $20 to $30 per hour. A live-in aide costs upwards of $200 a day. An assisted living residence costs anywhere from $4,500 to $8,500 per month, and I can tell you that those rates rise dramatically year-over-year. A nursing home costs anywhere from $8,500 to $12,000 a month, and like assisted living residences, the cost of nursing homes is rising dramatically, year-over-year.
Long-term care insurance is designed to mitigate the costs of long-term care. For instance, a person might purchase of policy of insurance that will pay $200 a day for five years. The $200 a day daily benefit may have a 5% inflation rider so the daily benefit will increase. Purchasing a $200 a day benefit today may be of little assistance twenty years from now when the cost of a nursing home is $40,000 a month if the daily benefit doesn’t have an inflation rider.
The problem with long-term care insurance is that it is costly, and most people don’t think they will ever need long-term care, so they don’t want to pay for something that, in their opinion, they will never need. The problem for long-term care insurance companies are multi-fold.
In 2010, there were fifteen companies that sold long-term care insurance. Today, five of those companies no longer exist. Of the ten companies that continue to sell long-term care insurance, one of the companies accounts for more than 20% of the total business.
A shrinking pool of companies offering long-term care insurance means that the industry as a whole is at risk of shriveling away. As fewer companies take on more and more liability, their creditworthiness becomes worse-and-worse.
Another problem for these companies is low interest rates. These companies depend on being able to invest the premiums they receive and obtain a reasonable rate of return on the money they invest. But in a low-interest rate environment, the companies are unable to earn a decent amount of money. The companies are then less able to cover the claims that will come in the future.
Finally, the fact of the matter is, there will be high claim rates on these policies, so if the few companies that sell the product haven’t been able to turn a decedent return, they won’t be able to cover the claims.