As responsible citizens, we all maintain homeowners insurance, automobile insurance, and maybe even life insurance or long-term care insurance. The goal of any insurance product is to spread risk among a large group of people and minimize your own exposure.
But if you are like me, you hate to write that insurance check each month, because the benefit of maintaining the policy is not immediately tangible. The longer you go without a filing a claim, the harder it is to place so much value on the “peace of mind” you were seeking when you first purchased the policy.
And that is the gist of the Insurance Paradox. Paying for insurance is a gamble. If you never file a claim, you’ve wasted all of that money on premiums. On the other hand, if you need to file a claim, it typically means that something negative has happened in your life—an accident, a death, the need for long term care.
I think that this is particularly true of Long Term Care insurance policies. It’s not particularly cheap, and there’s no guarantee that you’ll ever need to use it.
Perhaps then it is no surprise that according to Money magazine, a third of all long-term care policies are allowed to lapse before the policy owner ever files a claim. Many people find the cost hard to justify, or their caregivers or children find the cost hard to justify, and they cancel the policies or allow them to lapse.
The article calls into question the value of LTC insurance for many people. It states that LTC insurance “generally makes best sense for those with enough wealth to protect but not so much that they can afford to foot the bill should it ever become necessary. One rule of thumb: buy the coverage if you are worth between $200,000 and $2 million.”
I tend to disagree with that statement. Part of the analysis must depend upon what kind of coverage you have, and what kind of retirement income you expect to have.
For example, an individual with a high lifetime pension income of say, $7,500 per month is unlikely to be totally impoverished by a long-term care stay in a nursing home (which currently costs about $6,000 per year in Alabama). The stay will be expensive, to be certain, but that person’s income is likely to cover the stay without having to dip into their savings.
Similarly, you have to take into account how much LTC insurance coverage you have. If a “bells and whistles” LTC policy is over your budget (e.g., one with a daily benefit rate of $200 or more, inflation protection, lifetime coverage, etc.) that doesn’t mean that a more modest policy might not fit your risk profile. A good independent insurance agent can help show you the options.
In my experience, if a patient can cobble together enough monthly income from all sources to fund the cost of care when the time comes, without being financially ruined, that is a “win” in most cases. It’s a modest goal, to be certain, but a practical one. The patient is able to support themselves, and still leave an inheritance to their loved ones.
Sometimes, a Long Term Care policy is the difference between leaving an inheritance to your family, or leaving them nothing at all. Make sure you’ve thought about all of the consequences before purchasing or cancelling a LTC policy. And consider consulting with an Elder Law attorney as part of the process; he or she can help create a long-term care strategy that meets your particular needs.