Is Long-Term Care Insurance Right for You?

Yes, no, maybe; it really depends on your financial wherewithal, and your comfort with risk.

Out of more than 320 million Americans only about 8 million have long-term care insurance. Yet a national poll found that more than two-thirds are anxious and uncertain about how they’ll pay for the costs of aging and declining health.

That mix of statistics seems counter intuitive, but when you start to look into the cost versus benefit ratio of buying long-term care insurance, they make more sense. The statistics also turn a simple yes or no into a complicated maybe.

A study says only about the richest 20 to 30 percent of the U.S. population would benefit. Still, long-term care is expensive, and it’s worth your while to at least consider insurance in your retirement planning.

The long-term care study notes that in 2012 the average annual cost of a semi-private room in a nursing home was about $81,000. The cost of home healthcare averaged $21 per hour. Medicare provides only limited coverage, and Medicaid covers only the long-term care costs of those in poverty.

The study authors calculated that previous research on the subject overstated the financial risk involved in long-term care. That, in turn, led to their calculation that the “willingness-to-pay” of individuals who have a lot of money stashed for retirement is lower.

Using the study’s formula, 19 percent of men and 31 percent of women have a positive willingness-to-pay ratio. Since these ratios are higher than the 13 percent of the population that actually buys long-term care insurance, there’s still a significant coverage gap, writes longtime retirement manager and CBS Moneywatch contributor Steve Vernon.

One factor, Vernon believes, is that long-term care is so far in the future, people just ignore it as an abstract concept. Another is what the study authors refer to as “Medicaid crowd-out.” What that means to you is that Medicaid is much more “expansive” than Medicare for those who meet the program’s “means test.” That’s good, and then irony kicks in.

“Medicaid has secondary payer status,” the authors explain, “so if an individual of moderate means purchases insurance, much of the benefit accrues to the government in the form of lower Medicaid payment, rather than to the individual in the form of higher compensation.”

There’s more. If you don’t buy the insurance, then Medicaid bears much of the cost if care sucks up your assets first. The classic Catch-22.

So, with Medicaid crowd-out, “few individuals would choose to buy insurance even if they were rational, far-sighted and well-informed,” the authors conclude. That could well be you.

This makes long-term care insurance “optimal” for a small percentage of people, and for it to be worth the cost, you need to fall into that bullseye, a combination of relative wealth, the ability to gamble on high premiums, and a retirement portfolio that gives you other options in any case.

There’s yet another twist in the big picture. An important new finding by the study is that people who wind up in nursing homes are there for 30 percent less time than previous estimates.

This scenario means Medicare will cover many of those stays if you’re in a nursing home for far less time than previously thought. Another irony is that translates to less chance of your using long-term care insurance to pay for long-term illnesses and care.

Essentially, the study authors say that based on what they calculated, most people should just look at other ways to cover their needs into old age. One is doing everything you can now to stay healthy. That might sound trite, but research has shown that, indeed, an ounce of prevention is worth a pound of cure. 90-year-olds run marathons.

Maybe you can look toward family and friends who can and want to take care of you. That way, you’ll have what you probably intended when you considered buying long-term care insurance: remaining at home.

Because Vernon was a retirement program manager for more than 35 years, his advice tends toward having a rounded strategy for long-term care expenses no matter what – and he advocates starting early.

To him, that includes holding your home equity in reserve as a source to be tapped, maintaining a substantial investment reserve that isn’t “tapped” to generate retirement income, and holding the principal in reserve for long-term care costs.

You should also look for lower cost alternatives to a nursing home, such as residential care facilities, but whether they actually cost less is a matter of conjecture, where you live, and what’s available. Home health aides could also turn out to be less expensive, but again, that takes homework.

Other options could include buying a longterm care plan without all the bells ands whistles, which is cheaper. You’re gambling with a gap in coverage if you wind up needing it, but it’s better than trying to find money pay for it at a riverboat casino.

Also, if you buy a plan with a shorter elimination period, payments start sooner. Again, you’re gambling, in this case that you can get care paid for while you come up with other plans, like other potential sources of income.

Whether the risk is worth taking depends on a careful look at everything you consider an asset, including your health. Let a trusted financial advisor help you decide.