Ironically, while many people allow their lives to be exposed to the risk of an income-destroying disability, they are far more aware of a far less useful protection, long-term-care (LTC) insurance.
It isn’t that the need for LTC is less likely than long-term disability. Almost by definition, the former is much more likely, since anyone disabled enough to be unable to work is likely to be disabled enough to need long-term care, while most people who need long-term care have already retired and have no current working income for a disability to interrupt. Moreover, most women and a large percentage of men will need care lasting longer than 90 days at some point in their lives.
The problem is that we are talking about insurance, and the whole point of insurance is to protect against rare and unpredictable expenses. There is an old joke about someone going nuts shopping for presents on Christmas Eve who, totally exhausted and out of breath, runs into a relaxed friend who innocently asks, “Didn’t anyone tell you that Christmas was on December 25 this year?”
You don’t insure against the predictable: you save and invest for it. The likely need for long-term care, especially if you are alone (the reason longer-living women need it more often than men, of course), is part of what financial independence should be protecting you against. I’ve worked with enough widows who needed special care in their final years to know that the financial toll has been greatly exaggerated. Constantly overlooked is the fact that a single person in a nursing home for life has virtually no expenses OTHER than the nursing home. Do I have to point out that travel costs are nonexistent for someone who is bedridden? That she doesn’t need to maintain a personal residence? That she is not going to need her money to last another 30 years? And that insurance, even if sold on a nonprofit basis, adds enormous administrative costs to care that, for a likely event, could make the total cost exceed what she’d pay out of pocket? Of course, there is also the dilemma, shared by disability income protection, that the insurance company may dispute the claimed need for long-term care, although a long-term nursing-home stay is unlikely to be much in dispute.
Obviously, then, I’m not a big fan of LTC insurance intended to cover retirement years, since those costs should be manageable except in the case of early-onset Alzheimer’s disease, and the hard truth is that such a person is unlikely to notice the difference between the best facility money can buy and a Medicaid-covered bed.
Of course, long-term-care needs that start prior to financial independence and retirement are a possibility. Remember, however, that a working person who isn’t yet financially independent is supposed to have quality disability-income protection (and someone in a nursing home isn’t going to have to endure a disability insurer claiming he or she could still work). Maxing out on disability coverage, especially if you are paying your own premiums with post-tax dollars so that the benefits are nontaxable, should take precedence, and you will likely find that paying the premiums for LTC insurance on top of that doesn’t meet the cost-benefit test. Your choice, of course, and my opinion is just my opinion, since I don’t know your personal situation.
This leaves us with the one circumstance where LTC insurance seems most plausible because it will cover a rare event that disability protection would not address: a homemaker spouse will not be able to obtain disability income protection, but is still a critical part of the income-producing partnership, especially if children are still at home. More than one couple has discovered that they are financially much better off having only one of them work outside the house so long as their children need attention. The week of Mother’s Day isn’t a bad time to remember that moms are worth their weight in gold whether they are part of a two-earner couple that can afford quality professional care or they serve as cook/housekeeper/chauffeur/nurse/tutor/Girl Friday for the family. (I presume it goes without saying that this applies just as much to stay-at-home dads and two-parent households that have two mommies or two daddies, but I’ll say it anyway.)
In my opinion, LTC insurance is most sensible when it covers homemakers with kids still in the house. Without kids, evaluate the ability of the income-collecting spouse to continue earning good money from a home office. Every case is different here.
If you decide LTC insurance makes sense, again go with one of the providers that has been around a long time and sold a lot of policies. Several big players have pulled out of this area after suffering losses, therefore much respect is due for those who’ve stayed in the market. I’ve always been fond of John Hancock in this area, and many people I respect speak highly of Genworth. But there are others. (In addition to these two, I believe MassMutual, Mutual of Omaha, New York Life, and Northwestern Mutual are big players still in the game.) As with disability coverage, work with a broker since you won’t save money doing it yourself. Indeed, it might well be the same broker that helped you get disability income protection for the income-earning spouse. Ask that broker to help or to recommend someone. Or check out iQuote or the American Association for Long-Term Care Insurance if you don’t have a lead.
As for features, the same principle applies as with disability protection: this is about the big picture, not minor bells and whistles. If you can afford to do so, extend the waiting period. Don’t worry about benefits that will cover every dollar of costs, but choose enough of a daily benefit to make the balance affordable. Don’t pay for lifetime benefits, forgo the strongest inflation protection, and don’t add riders that cover incidentals or would not be that significant if applicable. Make sure your coverage includes home care by professionals, since you’re undoubtedly going to want to remain in your home if at all possible, and the costs here can be even higher than for a nursing home that benefits from economies of scale.
Forget about having your premiums frozen. Underpricing of long-term-care insurance is the main reason several players left the field, and insurance companies need the flexibility of raising the rates for a class. I have much more respect for John Hancock and Genworth, which raised rates to stay in the business, than I do for those that decided to stop selling policies and that shall go nameless on this blog.
Many scare tactics used to sell LTC insurance that ignore the cost reductions that accompany an immobile life, and I can’t promise that your broker won’t use them all. But if your family has children at home and a homemaker parent, solid protection that you can drop when the kids move out and/or you reach a sufficient net worth shouldn’t cost too much, since it is very unlikely to be used. You pay the insurance company for your peace of mind until you can handle the costs yourself, and they make a nice profit on insurance you never use. That’s what insurance should be.
Once again, I’ve given my opinion in an area with many different points of view, and I encourage anyone who either would like clarification or would like to express a different perspective to email me at askless@simplyrich.com.
I don’t want to depress people with insurance talk for several posts in a row, since it is all about bad stuff happening. So I think I’ll turn back to goal setting for a while and spend a couple of posts revisiting retirement spending and talking about how to slash college costs (and save for those you can’t avoid).