Can Retirees Dodge the Long-Term Care Insurance Mess?

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Retirement Planning

As the name “Two-Minute Retirement Solution” suggests, each week in this column, I try to provide solutions to retirement issues.

But the problems with long-term care are so big, solutions can be difficult to find…

The deeper I dig into the situation, the less I believe there’s a fix – at least not in the system’s current form. Costs for both the insured and insurers are exploding, and demand is skyrocketing.

And both factors are driving the private long-term care insurance market and Medicaid over the edge.

Presently, we have about 12 million people over the age of 80. By 2035, just 18 years from now, that number will double.

That means, in 2035, we’ll have twice as many people in need of long-term care, yet we’re already struggling to provide it to those in need now.

The annual cost for a semiprivate room in a care facility is around $82,000. A private room is $92,000.

When you consider that boomers have saved an average of about $20,000, a big percentage expect to live on an average monthly Social Security check of $1,300, and almost none have private insurance… none of it adds up.

At present, 51% of long-term care costs are paid by Medicaid, the last resort for in-patient care. Yet Medicaid won’t pay for in-home care, which is significantly less expensive.

When the time arrives that we can no longer care for ourselves, Medicaid is the only alternative for most. As the demand peaks, we’ll be faced with either decreasing other Medicaid services or significantly higher taxes to fund it.

Neither one will receive a warm welcome from voters, and none of the numbers add up.

A Tough (and Expensive) Call

The answer that appears to address all the issues associated with this problem is long-term care insurance (LTCI), but…

LTCI has never been a popular product.

The premiums are sky-high, there’s a good chance of it lapsing, and if you don’t use it, you recover nothing. The fact that we have had Medicaid to fall back on has kept many from purchasing it.

Only 8% of all long-term care costs are paid by private LTCI. The Medicaid fallback option has been the primary driver of the underuse of private insurance.

And if it looks like a bad deal for the insured, it’s terrible for the insurance companies.

The numbers here don’t add up either. And the insurance industry has taken a big dislike to this coverage.

The costs for good policies are all over the board. I’ve seen some for as little as $200 per month per couple (I wouldn’t count on much coverage from the cheap plans) to more than $600 per month per person.

In my personal search for a good policy – with an inflation rider and a 90-day exclusion (I’m not sure what you do for care during the first 90 days) – it runs around $300 a month.

That’s a lot for a person on a fixed income.

And because we’re living longer – but aren’t necessarily healthier – the numbers for the insurers haven’t made sense for a long time either.

At $300 per month, over a 20-year period, the average insured person pays premiums of $72,000.

At $82,000 per year for a shared room in a minimum-care facility, the costs add up to $246,000 for three years of coverage. And that’s for just the room.

Depending on your location, in-patient care can run as high as $182,000 per year.

Yes, some never use the policies… Many pay in, drop the coverage and recover nothing. But no matter what, no company can operate at a profit when the average cost is 3.4 times its revenue.

As a way to control costs, most plans now limit you to three years of care or less. What happens then is none other than… Medicaid.

The Cadillacs of LTCI plans of the ‘80s and ‘90s with unlimited stays and no exclusion periods have been losing money for some time. Some have already folded.

And the coup de grâce? In 2016, there were 50 companies each writing a significant number of LTCI policies. In 2017, that number dropped to just 10.

Industry Woes Multiply

When I said the insurance industry doesn’t like the product any more than the consumer does, I wasn’t kidding. Companies are bailing out like the place is on fire.

And the only fallback option for the majority of people is Medicaid. But you literally have to spend down almost all of your assets to qualify for Medicaid benefits.

One spouse can live at home while the other is in a facility, but the government comes after the property after the spouse living in a facility dies to recover its costs.

The idea of gifting assets to your children was commonplace at one time… but it’s long gone.

There’s now a five-year “look back” period for gifting. Meaning, when you apply for Medicaid, any gifts or asset transfers made within five years of your application date are subject to penalties.

The only viable option I see – for both the insurers and insured – is one that provides limited in-home care only.

Most people report that they’d prefer to stay at home rather than live in an in-patient facility.

The costs are significantly lower too… just $15,000 to $40,000 per year depending on the level of care.

And if the costs drop as much as 80%, the premiums should be much lower.

It doesn’t fix all the problems we’ll face in our later years, but I don’t see any other way to match coverage, costs and needs.

It’s a real mess – and one that’s getting worse every year. I wish the news was better.

Good investing,