Recently, I’ve had a few conversations with agents about clients who have purchased the life/long-term care products.
Now, it’s no secret that I am skeptical about the benefit of these products for clients (which I’ll explain later). When I share my concerns with the agents, I invariably get the response, “Well, something is better than nothing.”
Long-term care insurance (LTCI) is a complicated product because many factors need to be taken into account when selecting the appropriate product for the client. The major questions include how much benefit is appropriate, for how long, the nature of the deductible — commonly called the elimination period — and inflation.
The first factor — how much benefit is appropriate — can be determined by considering how much of the cost of care clients can cover with their own resources — how much they can pay “out of pocket.”
When care is needed, the lifestyle changes that occur at the same time often mean that other areas of spending go down. For example, they may be able to sell a car that is no longer being driven, will probably travel less, go out for dinner less frequently, and generally be out and about less. Those dollars that were formerly used for these things can now be reallocated to paying part of the cost of care. The interest generated on a life savings can also help pay for care, even while preserving the principal.
Selecting the proper product becomes essential in accomplishing what is intended here. If the combination of the clients’ income sources, along with the proposed LTC insurance benefit, is not enough to pay the monthly bills for care when that care is needed, the clients’ assets will be depleted. Eventually, the clients will become impoverished and need to turn to Medicaid.
Choosing the length of the benefit and the deductible is often a matter of what companies offer and what the clients prefer. Many companies have been shortening the length of time they will provide a benefit. Here too, clients may need to decide how much they can pay for on their own before they would need to turn to the insurance when considering these benefit levels.
One of the most vital items that must be considered when selecting an appropriate LTCI product is the impact of inflation on the benefits, especially when the needed care might not start for 20, 30 or 40 years from the time of purchase. The costs of long-term care services (such as assisted living, nursing care, home care, and so on) have been increasing by an average of 5 percent to 6 percent per year for the past 20 years.
Since about 2008, the impact of the recession has resulted in a slightly lower rate of inflation, but costs will likely accelerate in the future. The New York Times recently reported that “caregiving” will become the largest profession in the United States by 2020, overtaking retail. This is because of some basic demographic changes that are occurring.