In case you missed part 1 of the series, you can find it here.
Scott and I had a chat via email and I’m posting those conversations.
My questions are in bold italic and preceded by “ESI:” while his responses begin with “Scott:”.
At the end of each topic I add an “ESI’s Thoughts” section that summarizes my take on the issue and what Scott has said about it.
Once that topic is completed and we’re ready to move to the next one, I’ll separate the sections with a series of dashes like this: “——————-“.
We now continue with Scott giving his responses to my original question…
ESI: Please review the two long-term care (LTC) insurance articles I sent you (Long-Term Care Insurance Overview and Who Needs Long-Term Care Insurance?). What did I (and the commenters) get right? What did we get wrong (or something that needs to be considered from a different way)?
Scott: Companies dropping out of the business.
You mentioned in your article that you’re concerned that “you get a policy and then your insurer decides to leave the business of offering LTC insurance policies. Not sure what the implications are for current policyholders when that happens, but they can’t be good.”
You also quoted NerdWallet, “The number of insurance companies selling long-term care insurance has plummeted since 2000. More than 100 insurers were selling policies in the late 1990s, according to a 2016 study published by the National Association of Insurance Commissioners. Less than a dozen are selling policies today.”
The truth is that over 173 companies sold long-term care insurance at some point. Today there are 13 companies selling long-term care insurance in most states.
The issue, however, is not how many companies sell long-term care insurance today, but how many companies are paying long-term care insurance claims. Fortunately, the long-term care insurance claims data is published every year. All 173 companies paid long-term care insurance claims in 2018 (the most recently published data). They don’t publish the data for all 173, but they do publish the data for the 100 largest. When combined, the 73 smallest companies account for less than 1% of the total number of LTCi policies in-force.
Long-term care insurance policies are guaranteed renewable. That means that the insurance company guarantees to renew your coverage every year, as long as you pay your premium on-time. If the insurance company stops selling new policies, they still must fulfill all of their legal (contractual) obligations for every policy they’ve ever sold. They cannot change the contract.
Most companies stopped selling long-term care insurance between 1999 and 2003. The number of companies selling long-term care insurance since 2003 has been relatively stable.
Most of the companies that stopped selling LTC insurance made that decision AFTER the Rate Stability Regulation was approved by the NAIC in December 2000. The Rate Stability Regulation is something that didn’t come up in your research, but I’m sure we’ll get to it during our discussions. The Rate Stability Regulation forces insurance companies to reduce their profits if they seek a rate increase. It removed the profit incentive from rate increases. That’s why you see such a huge drop from 1999 to 2003.
The NerdWallet article was wrong when it said, “The uncertain cost of paying future claims as well as low interest rates since the 2008 recession led to the mass exodus from the market. Low interest rates hurt because insurers invest the premiums their customers pay and rely on the returns to make money.”
The “mass exodus” happened several years before the 2008 recession and it had nothing to do with low interest rates. The “mass exodus” had everything to do with the new pricing regulations.
To add some perspective on the number of carriers selling long-term care insurance, in the 1980’s there were over 400 insurance companies that sold medical insurance. How many companies sell medical insurance today?
In most states, consumers have more companies to choose from for long-term care insurance than they do medical insurance. The same is true for disability insurance. More companies sell long-term care insurance than disability insurance, in most states.
I thought this was very informative and did alleviate some concerns I had.
What do you think of his response?
Scott: Who needs long-term care insurance?
As I mentioned above, your article does a good job of explaining why you’re able to self-fund. However, I suspect that most of your million-plus visitors every year are not in a financial position similar to yours. How can those readers decide if they should buy long-term care insurance or not?
Again, it’s important to point out that the decision should primarily be based upon income, not assets. Let’s look at a few examples. These cases are taken from real people I’ve worked with:
This is a married couple in their mid-60’s. They just retired. Their home is paid off and worth almost $600,000. They have two CD’s of $100,000 each. They have no other savings or investments. They live comfortably on their social security checks and a small pension totaling about $2,000 per month for the husband and about $1,600 per month for the wife.
Even though this couple has a “net worth” of $800,000, they should NOT buy long-term care insurance. They could easily qualify for Medicaid by spending down just some of their savings. Also, if one spouse had to qualify for Medicaid, the spouse at home would be able to keep almost all of their combined monthly incomes.
Their residence is not at risk. Their income is not at risk. Only a little bit of their savings is at risk. They definitely should NOT own long-term care insurance.
Here is another retired married couple in their mid-60’s. They live near their children, in a high-cost of living area. They do not own a home. They rent. They have worked in academia all their lives. Due to a bad divorce and some financial mistakes, they have only $150,000 in savings. The wife has a pension of $75,000 per year, with a COLA. The husband has a pension of $90,000 per year, also with a COLA. They both have children from prior marriages.
If one spouse needs care, in order for Medicaid to pay for the care, that spouse’s entire pension will have to go towards the cost of care. The at-home spouse would lose all of the income of the spouse who needs care. If this couple can qualify for a reasonably-priced long-term care policy, it would make sense for them to own it. (They did, by the way.)
Most people would say that Couple #1 with $800,000 of net worth should buy LTC insurance, but the couple with only $200,000 of net worth should not buy LTC insurance. “Net worth” is only part of the story and in both of these examples the household income is the more important factor in determining which couple should own long-term care insurance.
In summation: To determine if you should consider owning long-term care insurance, first determine what you’d have to lose in order for Medicaid to pay for your long-term care.
First of all, I’m not sure he’s aware how many millionaires we have reading this site. 😉
I think many readers can certainly self-insure.
Second, we’ll get into Medicaid-related issues later on, so I’ll save my comments for then.
Scott: Long-Term Care Partnership Programs
Unfortunately, your articles didn’t mention the Long-Term Care Partnership Programs which are in effect in 45 states. The first Partnership Programs were started in the early 90’s in California, Connecticut, Indiana and New York. The Deficit Reduction Act of 2005 opened the program up to all 50 states. Five states have chosen not to participate in the program: Alaska, Hawaii, Massachusetts, Mississippi, and Vermont.
To help reduce Medicaid’s expenditures on long-term care and preserve Medicaid for the truly needy, 45 states have created a “public-private” partnership to help the middle-class plan for long-term care. These “Long-Term Care Partnership Programs” encourage the middle-class to purchase an amount of long-term care insurance that is equal to their assets. If their long-term care insurance policy runs out of benefits they can apply for Medicaid to pay for their care and their assets would be protected from Medicaid “spend down” and Medicaid “estate recovery”. More specifically, for every dollar their long-term care partnership policy pays in benefits, they can protect a dollar from Medicaid.
Married couple, husband age 61, wife age 58. They could retire now if they had to, but they both love what they do. He’s a former controller and does business consulting part-time. She works part-time for a local pre-school. Their net worth is about $1.8 million. Their house is worth about $600,000 with a small mortgage. Most of their investments (about $1.1 million) are in traditional IRA’s and 401k’s. They expect to live on roughly $85,000 per year once they fully retire.
He and his wife bought a long-term care partnership policy that starts off with $930,000 of shared benefits. The benefits grow every year by 3% compounding. By the time they are in their mid-80’s it will have over $1.9 million in benefits.
Protecting their assets for his wife and their two children is very important to him. He insisted on getting a long-term care partnership policy in order to protect their assets just in case they exhaust all the benefits in their policy and have to rely on Medicaid.
If, for example, the policy paid out $1.9 million in benefits, they could keep $1.9 million in additional assets if they ever have to apply for Medicaid.
Their annual premium is a little over $6,000 per year because they both had some health issues and were not able to qualify for the lowest rates. Fortunately, they are able to deduct most of the premium off the top of their income since he’s self-employed. After the federal income tax savings, the net cost for the policy each year is about $4,300.
He’s 57. She’s 55. They emigrated to the U.S. from India in 2000. They used their life’s savings to make a down payment on an 800 square foot condo in which they still live. They have about $90,000 worth of equity in the condo. They have about $200,000 in savings. He’s a bus driver and she works in a grocery store. They are about ten years from being able to retire.
They bought two long-term care insurance policies where they share $150,000 in benefits. The benefits grow every year by 3% compounding. By the time they reach their late 70’s/early 80’s, their policies will have about $300,000 in total benefits. If they were to receive $300,000 in benefits from the policies, they could apply for Medicaid and they could protect $300,000 plus the roughly $125,000 Medicaid already allows the healthy spouse to keep.
Because the benefits are modest, their combined monthly premium is less than $160 (about $95 for the wife and $65 for the husband).
These “Long-Term Care Partnership Programs” encourage the middle-class to purchase affordable long-term care insurance coverage. They can target how much long-term care insurance they need based upon how much of their savings they want to protect from Medicaid.
If they want to protect more savings they can buy more benefits for a higher premium. If they have less savings they can buy less benefits for a lower premium. It’s an equitable and affordable solution for those who want to plan ahead.
ESI: Are there any sort of restrictions for any reason on Long-Term Care Partnership Programs?
Scott: To apply for a Long-Term Care Partnership policy there are no asset or income requirements.
To receive benefits from a Long-Term Care Partnership policy there are no asset or income requirements.
If, after using the benefits in a Long-Term Care Partnership policy, the policyholder applies for Medicaid, the policyholder must still meet the Medicaid eligibility requirements. However, the eligibility requirements are more lenient for someone who has used their Long-Term Care Partnership policy. For every dollar their Long-Term Care Partnership policy has paid in benefits they can protect one extra dollar from Medicaid.
He’s right. I didn’t know anything about Long-Term Care Partnership Programs. None of the gazillion articles I read in doing my LTC research mentioned them.
FYI, Scott has a page dedicated to these that you can find here.
Just to add a bit more clarity (hopefully) to what these are, I found the following articles discussing them.
First, here’s what AARP says (FYI, this post is from 2006 — you think Google could find something more current for page 1 results):
The long-term care insurance (LTCI) partnership program was developed in the 1980s to encourage people who might otherwise turn to Medicaid to finance their long-term care (LTC) to purchase LTCI. If people who purchase qualifying policies deplete their insurance benefits, they may then retain a specified amount of assets and still qualify for Medicaid, provided they meet all other Medicaid eligibility criteria.
Although the partnership program was intended to attract lower- to middle-income Americans (the cohort most likely to spend down to Medicaid), state policyholder surveys indicate that most purchasers have substantial assets. The majority of purchasers in California, Connecticut, and Indiana had assets in excess of $350,000. In contrast, the average person age 55 or over has less than $50,000 in assets. The New York program, unique in that it allows unlimited asset protection for purchasers, has primarily attracted higher-income purchasers, because of this feature and its resulting higher premium costs.
Second, here are thoughts from Kiplinger (a 2008 article):
One of the most interesting new developments in long-term care is the expansion of the state long-term care partnership programs. In states that have passed these laws, people who have an approved long-term care insurance policy can qualify for Medicaid to help pay their long-term care bills after they’ve exhausted their coverage without having to spend almost all of their assets first.
If their long-term care policy provides $200,000 of benefits, for example, they’ll be able to protect $200,000 of their assets after using up their long-term care coverage and have Medicaid pay the bills.
Here are the specifics for what my state (Colorado) offers:
Colorado allowed insurers to sell qualified LTC Partnership policies beginning on January 1, 2008. For every dollar that a LTC Partnership insurance policy pays out in benefits, a dollar of personal assets can be protected (disregarded during the eligibility review and at estate recovery) if you choose to apply for Health First Colorado (Colorado’s Medicaid Program).
For example, LTC Partnership policy holders who apply for Health First Colorado coverage are able to maintain some level of assets (equal to the LTC insurance benefit paid) above the $2,000 Health First Colorado asset limit currently in place for eligibility purposes and a corresponding disregard during the estate recovery process at the individual’s death.
Partnership and non-Partnership policies are virtually the same except that Partnership polices have the added benefit of allowing policyholders to protect a portion of their assets if they choose to apply for Health First Colorado.
This is some important (and interesting) information that we don’t see covered much (as evidenced by how old these top-ranked articles are).
Discovering Long-Term Care Partnership Programs doesn’t change much for those who aren’t planning on the Medicaid option, but obviously does for those considering it.
Let’s move on…
ESI: The examples are helpful, but they are very specific. Obviously personal finance is personal (i.e. unique to the individual’s situation), but I’m wondering if there are any rules of thumb people should consider when thinking about the subject of LTC.
Scott: There are only 2 rules:
1) If someone can easily qualify for Medicaid, then they don’t need any type of long-term care insurance.
2) Someone should self-fund their long-term care when the insurance options available to them are not a good value.
ESI: I’m not sure I’m clear on when you would recommend that people should self-insure. Is there any time that this is the answer? If so, what circumstances lead to that answer?
Scott: Someone should self-fund their long-term care when the insurance options available to them are not a good value.
ESI: How do you determine whether or not an insurance option available for someone is or isn’t a good value?
- P = Annual premium for $1,000,000 of long-term care insurance
- W = Net Worth
If P/W is less than .005 then it is probably a good value.
I LOVE having this sort of information! A good rule-of-thumb is a great starting place for considering this topic IMO.
Let’s say I wanted $1 million of LTC insurance.
That means it would probably be a good value for me if the annual premium was $20,000 ($4 million net worth * .005) or less.
That makes it seem like a no-brainer.
Is this a legitimate rule-of-thumb or one made up by insurance agents to get people to buy more policies? The skeptical side of me wonders.
Why do I need it anyway if I can afford to self-insure?
For more on this series, check out part 3.