Submitted by:Dr. Jo Turner, CFP, Professor, Family and Consumer Economics

A study by Jean M. Lown and Lance Palmer in the Journal of the Association of Financial Counseling and Planning Education. Volume 15 (2), 2004.

Summary

The question of whether to buy long-term care insurance (LTCI) is similar to that of whether or not to pay off your home mortgage early. Both questions require a thorough analysis of financial goals, risk management strategies, long-term financial projections and longevity analysis. In fewer than 20 years, LTCI policies have grown from 200,000 to four million. The authors of this research believe that many people have been sold insurance rather than selecting to buy it. They think that there are alternatives to LTCI that should be explored.

First, not everyone can afford the premiums. For example in one study (Health and Retirement) of 700 respondents, only 23% had kept their LTCI policy. However, an industry report in 2004 stated that 7 out of 10 LTCI policies were still in force. McNamara and Lee (2003) reported a 75% lapse rate. Many policyholders let their policies lapse because they can’t afford the premiums after they retire and are on fixed incomes. The price of LTCI policies is based on the assumption that many purchasers will drop out before incurring any claims. There are concerns about the industry. There is a lot of uncertainty about the future demand on the insuring companies. The National Association of Insurance Commission data reveal that LTCI policies paid out only 35% of premiums in 2001. Consumers Union, after reviewing 47 policies in 2003,
considered, that for most people, long-term care insurance was too risky and too expensive.

Criteria for purchasing Long Term Care Insurance:

• Age 55 or older with a chronic medical condition


• Family history that indicates need for nursing home


• Assets of $200,000 to $1.5 million


• The desire to protect assets


• Capacity to absorb potentially high premium increases


• No family member who is willing to care for you.
  

Low income, low asset individuals simply cannot afford LTCI insurance and must rely on family, friends or Medicaid to pay for care. High income, high asset consumers have sufficient resources to self insure for costs of care. The people in the middle who fear a long stay in nursing home, depletion of their assets and impoverishing a spouse need guidance that has not been available to make this decision. Thus, this research presents an alternative decision making framework for funding long-term care based on the risk management principle of self-insurance. (Self-insure by investing the annual premium.)

Six alternatives to purchasing LTCI:

1. Risk avoidance (This option is not viable due to the aging process.)


2. Loss prevention and loss reduction. These alternatives deal with life
   style choices, i.e. diet, exercise, activities.


3. Risk transfer – pre arrange with family and make an agreement for care (family
   and friends are sole caregivers of 70% of the elderly) or


4. Medicaid for low-income individuals.


5. Risk assumption and


6. Self-insurance. May be effective tools but you must have resources to cover
   potential costs.

A plan to address potential needs should include multi strategies. If one self-insures, he/she needs to evaluate family history of longevity and chronic illnesses. Women live longer than their spouse whom they care for. Long-term care is a woman’s issue. The average age at which people enter a nursing home is 83. The average stay is 2.3 years at $50,000 per year, which is $115,000. One third of the nursing home stays is 90 days or less. However, nine percent of residents stay five or more years.

Advantages of self-insurance approach:

• Greater flexibility in use of financial resources


• No worries about having policy lapse from failure to pay premium


• No problems with policy restrictions, the money can be used to pay relatives who
  care for you or for other needs.


• No concern about insurance company insolvency


• Heirs can inherit the remainder of self-insurance fund not needed for care
  

Implications for Extension Programming

Given the critical nature of lengthening life span and the increasing need for
long term care, conducting programs that will help clients determine how much
long term care may cost and resources available to fund long term care would
help focus the need on financial planning for the last stage of the life cycle.
A speaker from the Florida Department of Financial Services and their booklet
“Long-Term Care & Other Options for Seniors,” would be appropriate.

Web sites that will be helpful:

http://www.ces.purdue.edu/retirement

http://www.financinglongtermcare.umn.edu

http://www.elderweb.com/default.php?PageID=2770

retirement, money, insurance, long-term care, LTCI, financial planning