My Mom & Dad called recently to get my take on their Long Term Care (LTC) insurance. They’ve had a policy for fourteen years and recently got a notice from their insurer that their rates would be going up. The increase – stepped over the next few years – totaled a little more than +50% versus what they were paying now. If they didn’t want to pay the higher premium, they also had the choice of stepping down the amount of coverage they had to keep their premiums the same.
Here is the premium and coverage they have now:
They are being given to options for the future:
1) higher premium, same benefit; or, 2) same premium, but lower benefit:
The difference between the two options is about $1,200 of premium for $14,560 worth of coverage. I felt like Option 1 was the better choice for them for a number of reasons:
- COVERAGE LEVEL – The average cost of Assisted Living care is about $42K a year, the cost of Home Care (8 hours/day) is about $48K, and the cost of a private room in a Nursing Home is $88K a year. While my Mom’s benefit feels like it is at the high side of the range, my Dad’s is short of the range.
- ADJUSTED RISK – About 70% of people are said to make some type of claim on their LTC policy, including 40% that enter a nursing home for, on average, 2.4 years. Just using nursing home utilization as a possibility, a 40% risk factor multiplied by an $88K cost for 2.4 years yields a risk adjusted potential cost of $84.5K. Again, she is pretty well cover for that, but he is less than half of the payout. For him, they would need to cash flow the balance.
- BREAKEVEN – The payout on $1,200 extra a year in premium for an additional $14,560 in benefit is about 12 years. I’m no actuary, but that is a pretty long time. Given their ages (84 & 79 this year), that feels like more than enough time for the payout window to make financial sense – although I’m hopeful they both live to 115!
- PEACE OF MIND – I mentioned to them that when I got married, my oldest brother (their oldest son) suggested I buy plenty of insurance “so you needn’t worry about any kind of calamity.” I’ve followed that advice for the most part over the years and never felt bad about the extra cost. I wouldn’t tell my Mom that she might be “over-insured” for the risks, because I want her to have that peace of mind. If anything, he is the one who might have gotten a bit more coverage when they started the policy.
After we chatted, I looked up LTC insurance in the new Jane Bryant Quinn retirement book. The chapter it is in has a headline “Don’t Skimp On Insurance” and she talks about the hardship that some married couples face when one spouse is left holding the bag for expensive long term care.
What has been your experience in thinking about the cost/benefit relationship with respect to Long Term Care insurance? Any additional considerations?
Image Credit: Pixabay; LTC Cost Graphic: Ameriprise