Long Term Care Insurance: Is It Worth It?

Long-term care insurance (LTCI) was conceived as a financial safety net for individuals facing the prospect of extended care needs in their later years. It’s estimated that 70% of adults will need some form of long term care in their lifetime.[i] While it seemed like a good idea at the time, a number of factors have made it a much less attractive choice for many.

LTCI Insurance History

Beginning in the 1970s, long-term care insurance emerged as a solution to safeguard the retirement savings of elderly individuals and prevent them from relying on Medicaid, the state-federal program for the impoverished and disabled. Initially designed for nursing home care, policies evolved to encompass in-home care and assisted living centers. Between 1990 and 2002, policy sales doubled in response to escalating demand. However, the industry faced challenges as it underestimated the actual costs of its products. Early policy prices were set competitively low based on flawed actuarial models. Projections of policyholders’ longevity were inaccurate, as U.S. life expectancy rose from around 68 years in 1950 to nearly 77 years in 2000, leading to increased care needs.[ii]

Rising Premiums

Long-term care insurance premiums have experienced a steady and often steep increase over the years. The rising cost of healthcare services, coupled with longer life expectancies, has led insurers to adjust premiums to maintain profitability. This escalation in premiums makes LTCI less affordable for many individuals, especially those on fixed incomes or nearing retirement. As a result, potential policyholders are forced to weigh the financial burden against the uncertain future need for long-term care.

Limited Eligibility and Underwriting

Another obstacle to the effectiveness of LTCI lies in the stringent eligibility criteria and underwriting processes. Insurers often subject applicants to thorough medical evaluations, and those with pre-existing health conditions may face either exorbitant premiums or outright rejection. This exclusivity renders long-term care insurance inaccessible for those who may need it the most, contributing to the widespread gap in coverage for individuals facing imminent care needs.

Lack of Incentives for Younger Individuals

Long-term care insurance is typically marketed to an older demographic, and younger individuals often neglect it due to a perceived lack of urgency. However, purchasing LTCI at a younger age can result in lower premiums. The challenge lies in educating younger individuals about the importance of planning for future care needs and the financial benefits of securing LTCI early on.

Changing Landscape of Healthcare

The evolving landscape of healthcare and the growing emphasis on preventive and community-based care challenge the traditional model of long-term care insurance. Many individuals are now seeking alternative options, such as aging in place, which may not be covered adequately or at all by standard LTCI policies. As healthcare delivery methods evolve, long-term care insurance must adapt to encompass a broader range of services to remain relevant.

Over-reliance on Government Programs

Some individuals assume that government programs, such as Medicaid, will cover their long-term care expenses, leading them to forego purchasing LTCI altogether. However, Medicaid eligibility is means-tested, and not everyone qualifies. Furthermore, relying solely on government programs may limit the choice and quality of care available, underscoring the importance of supplementing such programs with private insurance.

LTCI Insurance Alternatives

Though traditional LTCI may not be a fit for you, there are alternatives that could make sense.

Health Savings Accounts (HSAs): Consider contributing to an HSA, which allows you to save money tax-free for medical expenses, including long-term care.

Critical Illness Insurance: This coverage provides a lump sum payment upon diagnosis of a covered illness, offering financial support for various medical needs, including long-term care.

Life Insurance with Long-Term Care Riders: Some life insurance policies offer riders that allow you to use a portion of the death benefit for long-term care expenses.

Annuities with Long-Term Care Benefits: Certain annuities come with features that enable you to access funds for long-term care without forfeiting your principal investment.

The Bottom Line

The majority of individuals aged 65 and above will likely require long-term care at some stage in their lives. Given that long-term care insurance may not be suitable for everyone, it is advisable to investigate alternative options. When preparing for the potential high costs of long-term care in the future, consider the alternatives mentioned above as viable and thoughtful alternatives.[iii]