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 responding to my questions…
Scott: Net worth of my clients.
About one-third of my clients have a net worth under $1,000,000. About one-third have a net worth between $1.0 million and $2.5 million. And about one-third have a net worth over $2.5 million. I even have several clients who are “decamillionaires”.
Certainly, many of them could afford to “self-insure”. But, as I stated, “self-insuring” for long-term care is about more than just assets or net worth. It’s about cash flow mainly and some “not-so-obvious” benefits.
I have asked my decamillionaire clients why they decided to buy long-term care insurance when they have an 8-figure net worth because, after all, the pundits say they should self-insure. They all say similar things (these are actual quotes):
1) “The premium is small potatoes compared to the potential benefits.”
2) “My spouse or kids won’t have to labor over what asset to sell first to pay for my care.”
3) “My family won’t sacrifice their own health trying to care for me on their own in order to try to preserve the estate. They’ll use the insurance ASAP and not delay hiring proper home care because we bought the insurance for this purpose and, by George, we’re going to use the insurance.”
These comments are worth some consideration.
I know that I often look at things merely from the cost side of the equation, but there are non-monetary issues at work as well.
So let’s look at these three one at a time…
“The premium is small potatoes compared to the potential benefits.”
We start with a financial comparison. I’m sure the premium is small compared to the POTENTIAL benefits. But what are the EXPECTED benefits?
For example, let’s assume the following (FYI, numbers are taken from Dave Ramsey’s site):
- $2,727 annual premium that you pay for 15 years = $40,905
- Amount of coverage ($161 per day for 4 years): $235,060
So yes, avoiding a $235k expense by paying $41k is a great deal.
But let’s say the odds of you collecting the $235k are 10%. This then gives you an expected value of $23.5k from the policy ($235,060 * 10%), which is way below what you actually paid ($41k).
Now I’m not saying the odds are 10% that you’ll get the $235k, I’m just illustrating a point. Everyone will need to make the cost versus EXPECTED (not POTENTIAL) payout comparison themselves.
“My spouse or kids won’t have to labor over what asset to sell first to pay for my care.”
This is a legitimate issue and one that makes me consider getting LTC insurance.
If I could pay $41k and make things easier for my family, would I do it? Probably.
But is there another way to “make it easier for my family”? Probably so.
“My family won’t sacrifice their own health trying to care for me on their own in order to try to preserve the estate.”
Another great non-monetary reason to consider.
I’m sure many (most?) of us don’t want to be a burden on our families if we need LTC — even if it is to preserve their inheritance.
Something to think about.
Scott: Not-so-obvious benefits of long-term care insurance.
The main benefit from owning long-term care insurance is that we do not know:
1) when we will need care and
2) for how long we will need care
Here’s an example. This man FIRE’d at the age of 40. Yet, his retirement is at risk because his wife will likely need long-term care in the near future.
At the age of 40, he and his wife could have bought $1M of LTCi for about $100 per month per spouse. At some point in life, FIRE’s have to realize that protecting what they have is at least as important as trying to get more.
The younger someone is when they retire, the more important it is to own long-term care insurance because the younger you are the GREATER the risk! The probability of needing care in your 50’s is lower than the probability of needing care in your 80’s. But, the risk is greater! If you need care in your 50’s it will have a greater impact on your family (and your finances) than if you need care in your 80’s.
When to buy LTCi has NOTHING to do with your age. It has EVERYTHING to do with your stage in life. There are 65 year olds who should NOT buy long-term care insurance. There are 45 year olds who should buy long-term care insurance.
Although there are non-financial benefits to owning long-term care insurance, it is first and foremost, asset and income protection insurance. It’s portfolio insurance. A healthy, 59-year old couple, can buy $1.5 million of long-term care insurance for a combined annual premium of $4,000. If that couple has a portfolio of $4,000,000, that means the cost of the policy reduces their annual rate of return on their portfolio by only 10 basis points. Some of my clients refer to this as a “liquidity premium”.
Like most, my mother-in-law’s portfolio has gone down about 25% since the beginning of the year. But, every month, we get $6,000 from her long-term care insurance policy which covers the full cost of her care. We have not had to sell anything in this down market. We can keep her investments “in the market” and “working” for her because the policy is paying for her care.
So, who should buy long-term care insurance?
If someone has enough income/assets to protect, they should buy long-term care insurance, regardless of their age. If someone doesn’t have enough income/assets to protect, then they don’t need long-term care insurance (yet).
Dave Ramsey says to buy LTCi at age 60. The problem with waiting until age 60 is that many people are uninsurable by that age.
Someone at Dave’s Baby Step #5 can buy a very low-cost “starter” LTCi policy that includes a rider to buy more benefits in the future regardless of health. Once someone’s done with Baby Step 6 they can activate the rider, pay the additional premium, and increase their benefits, even if they’ve had a health change and have become uninsurable.
Here are Dave’s Baby Steps if you’re not familiar with them:
- Baby Step 1 – $1,000 to start an Emergency Fund
- Baby Step 2 – Pay off all debt using the Debt Snowball
- Baby Step 3 – 3 to 6 months of expenses in savings
- Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
- Baby Step 5 – College funding for children
- Baby Step 6 – Pay off home early
- Baby Step 7 – Build wealth and give!
But, here’s the BEST reason for owning a long-term care policy:
“… so that your kids (loved ones) don’t have to agonize over whether or not to get you the care you need, which might otherwise cost them some of their inheritance. Who would want to put that trip on his or her kids?”
When my mother-in-law needed care, the siblings didn’t have to argue about, “which asset do we liquidate first…” This is something which can cause a lot of strife between siblings especially if some of the siblings are not as financially secure as the others. There was enough stress just dealing with the move, the downsizing, her health issues, etc…
Thankfully, we all knew she had the policy and that it would cover the full cost of care. No stress, no fighting, no bickering.
Over 10 years she paid about $35,000 in premiums. She’s already received over $150,000 from her policy and her policy still has about $200,000 of benefits remaining. Plus, we saved about $100,000 in capital gains tax because we didn’t have to sell any of her rental properties.
ESI: I need you to expand on what this statement means:
“When to buy LTCi has NOTHING to do with your age. It has EVERYTHING to do with your stage in life. There are 65 year olds who should NOT buy long-term care insurance. There are 45 year olds who should buy long-term care insurance.”
And how does it fit with this statement:
“Dave Ramsey says to buy LTCi at age 60. The problem with waiting until age 60 is that many people are uninsurable by that age.”
They seem to contradict each other.
Scott: Instead of saying “stage in life” I should have said, “financial stage in life”.
When to buy long-term care insurance has everything to do with one’s “financial stage in life”, not their physical age, because anyone can become disabled at anytime.
However, if a 65 year old can easily qualify for Medicaid, he/she should not buy long-term care insurance.
If a 45 year old has all of his/her financial ducks in a row, he/she should probably buy long-term care insurance.
Does that clear it up for you?
A lot of the LTC decision is coming down to a couple issues IMO:
- Do you want to leave as much of an inheritance as possible to your heirs?
- Do you want to make LTC issues easy on your family members taking care of you?
If either of these is true, you need some sort of financial plan for LTC that involves insurance or something similar.
If neither are an issue and you can afford to self-insure, that seems to be the most reasonable path.
Thoughts on this?
This next section has a lot of back and forth about a variety of topics. I seemed better to let it run its course before jumping in, so that’s what I’m doing…
ESI: When someone approaches you about considering LTC insurance, what is the process you take them through to decide whether or not it’s right for them?
Scott: The first thing I do is review their health history with them. Their health history will determine which policies they may qualify for.
Then I’ll ask them some basic financial questions to see if a policy makes sense for them.
If they can qualify for Medicaid then they don’t need long-term care insurance. A lot of middle-class couples can qualify for Medicaid-funded long-term care pretty easily.
ESI: Is there ever a time when the answer is “There’s nothing right for you. You don’t need any financial products for this issue?”
Scott: Those are two very different questions.
“There’s nothing right for you.”
That’s the answer I give to about 50% of the people who come to my website. They don’t need any type of insurance because they can either qualify for Medicaid-funded long-term care or they can’t qualify for any insurance due to their health history.
“You don’t need any financial products for this issue”.
Many people may not need long-term care insurance products, but they want them.
ESI: What are the key life issues where people should at least consider LTC insurance? (age, family situations, net worth, etc.)
No. Age should never be a factor in determining whether or not to purchase long-term care insurance. You’ll see why in the examples I’ll provide for you in the email I’ll send you later today.
I’m not sure what you mean by “family situations”. If you mean relying on your adult children to provide care, the consequences of relying on adult children to provide care are greater than most people think. I was a caregiver of a parent who had a major stroke. The stress of being a caregiver nearly ruined my marriage.
Net worth is an issue but it’s not as important as you might think. The email I’ll send you later has several examples in it with varying amounts of “net worth”.
ESI: How do the solutions break down by percentages? (how often do you recommend a traditional LTC policy versus a hybrid insurance product versus something else?)
Scott: The percentages change. Last year we recommended hybrids to about 30% of our clients. This year we’ve recommended hybrids to less than 5% of our clients.
Which type of product we recommend depends primarily on their health history. Traditional long-term care insurance is almost always the best value.
However, there are situations where a hybrid product can make more sense. Such as anyone:
- who wants to use a 1035 exchange to pay their premium should buy a hybrid.
- applying for coverage over age 70 is may be better off with an annuity/LTC hybrid, rather than a traditional LTCi policy.
- who can’t qualify for traditional LTCi may be able to qualify for a hybrid.
- who wants a lifetime/unlimited benefit period is probably better off with a hybrid, than a traditional LTCi policy.
- who wants to fund their policy with qualified funds should buy a hybrid.
- couples, if one spouse can’t qualify for a traditional LTCi policy, they may be better off buying a hybrid policy together.
ESI: What is the full set of options for managing the long-term care issue? Obviously there’s LTC insurance, which we’ve talked the most about. You also mention hybrids. What are these and who are they suitable for? Are there any other solutions/options we haven’t discussed?
Scott: The full set of options are:
- Traditional LTC insurance
- Long-Term Care Partnership policies (which are a subset of traditional LTC insurance)
- Life/LTC hybrids
- Annuity/LTC hybrids
- “Recovery Care” policies (aka “short term care”)
There are two types of hybrids:
- A life insurance policy with a rider that allows the death benefit to be used to pay for long-term care. With the better hybrids, the long-term care benefits can be 2x to 3x the death benefit.
- A deferred annuity with a rider that allows the annuity value to be used to pay for long-term care. With the better hybrids, the long-term care benefits can be 2x to 3x the annuity value.
Hybrids are generally good for the following people:
- Those who have significant appreciation in a permanent life insurance policy or a deferred annuity (non-qualified) and want to avoid paying tax on the appreciation.
- Those who can’t qualify for traditional long-term care insurance or would qualify at a “substandard” rate.
- If one spouse cannot qualify for traditional long-term care insurance, it may make sense for both spouses to buy a “joint hybrid”.
- Anyone who wants a policy with a lifetime/unlimited benefit period is probably better off buying a hybrid rather than a traditional LTCi policy.
- Anyone who wants to use an IRA to fund their long-term care, especially if they are comfortable self-insuring for 3 years and especially if they want a lifetime/unlimited benefit period.
- Generally, anyone over the age of 70 is probably better off buying an Annuity with an LTC rider, rather than buying a traditional LTCi policy, especially if female.
The worst ways to pay for long-term care are QLAC’s, Roth IRAs, HSAs, and deferred annuities that will “double the income” when long-term care is needed.
ESI: In your opinion, is there one solution that will work for the majority of people?
Scott: Yes. Medicaid. That is the solution for the majority of people.
ESI: Are Medicaid-funded options that great?
Many readers commented that they had to consider Medicaid facilities for their loved ones and the places were way less than desirable.
Scott: No. Medicaid-funded options are not that great.
The best home care agencies do not accept Medicaid. The best facilities do not accept Medicaid. If someone can afford long-term care insurance, then they should buy long-term care insurance and try to avoid going on Medicaid.
ESI: You say Medicaid-funded options are not that great and yet you recommend them for the majority of people?
Scott: Yes. Most of the people who think they should buy long-term care insurance don’t need it because their assets/income are so low they can easily qualify for Medicaid.
ESI: Is this simply a reality of their financial situations — that they have to take Medicaid because they can’t afford a better alternative?
Scott: Yes. If someone can’t afford to own a car they will have to rely on public transportation.
A couple thoughts from me on the above:
“Traditional long-term care insurance is almost always the best value.”
This page compares the cost of a hybrid versus LTC insurance.
Here are the annual costs for a 55-year-old couple:
- LTC insurance: $2,100
- Hybrid: $8,100
And annual costs for a 65-year-old couple:
- LTC insurance: $3,700
- Hybrid: $13,800
That’s a big difference!
“Medicaid-funded options are not that great.”
I think I would do everything possible to avoid a Medicaid solution if I was close to that option. From reader comments here, they just don’t sound like great places to live.
Costs versus Benefits of LTC Options
Separate from the above, I had a reader send me this post about LTC insurance after I wrote the last series. It’s written by Allan Roth, the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor. Here are some highlights that are worth considering IMO, starting with this introduction:
We must understand the probability of needing care and, if so, for how long and at what cost. This is a distribution curve rather than a discrete, binary “yes” or “no.” If you end up needing LTC for 100 days or less, you may pay very little. Medicare could cover most of the costs if you are admitted to a Medicare-certified nursing facility within 30 days of hospital stay of three days or longer. If you stay 10 years, however, the costs could be staggering.
All insurance companies, even mutual insurance companies, need to cover their costs (including commissions) and make a profit. Thus, the odds are that buying LTC insurance will be the “wrong” decision, in the sense that the expected benefits, net of costs (including opportunity costs one could earn if they invested the premium) will be less than zero. But that’s the same as any insurance policy. We buy insurance because the consequences of being wrong are significant. An example is a high-income earner needing term life insurance, which is likely to expire worthless, because the consequences of dying early and leaving the family exposed are just too high.
It discusses the issue of living expenses going down if someone needs LTC, an issue we covered earlier in this series:
The industry is quick to point the high costs, but I’ve never seen mentioned that there are also savings – especially if one is single since they would no longer need a house, car, insurance, be travelling, eating out, etc. Often one spouse becomes the caregiver, but might need care themselves later after the spouse has died. If that’s the case, they save quite a bit in expenditures.
I thought so.
His final conclusions:
If one needs LTC for an extended period, either type of policy will be very beneficial. But I don’t find the probability-adjusted benefits compelling. Buying LTC insurance has other risks, such as delaying retirement (because one has to work longer to pay for the policy), running out of money while not in a home, or even hyperinflation which, over a couple of decades, any of which would diminish the real benefits. Health care inflation currently far exceeds the CPIU. Another risk is that the government comes out with a subsidized plan that could be superior. Finally, I’ve heard stories about fights with insurance companies who have denied coverage.
Of course, it’s not a buy or don’t buy decision. I’ve reviewed two very rich policies, but one could partially self-insure by buying a scaled down version with lower benefits. Though I’d consider longer elimination periods or lower daily benefits, I wouldn’t skimp on the number of years the benefit pays out. One should buy insurance for a catastrophic event – a long stay in a nursing home.
What’s not in this analysis are life decisions. For example, I did not consider whether one would prefer to be at home and how much of a burden would it be for one spouse to have to care for the other. Potential dementia of one party could make it virtually impossible for the other spouse to be the caregiver.
Carolyn Rosenblatt, author of The Boomer’s Guide to Aging Parents: The Complete Guide and web site AgingInvestor.com, said not to underestimate “caregiver burnout” among family members giving care. Still, she suggested a better plan than buying LTC insurance is to be active, eat healthy and maintain a strong social network of family and friends.
I know. It’s clear as mud.
But Allan does look at both LTC insurance and hybrid policies and comes to these conclusions for himself:
Regarding LTC insurance policies: Because there would be substantial cost savings from not travelling, eating out, shopping, not needing a car or potentially even a house, we decided we can self-insure versus this option (buying LTC insurance). I suspect many of our clients could as well.
Regarding hybrid policies: With some cost savings after entering the home, I also decided to self-insure as I do for most of my clients, who are typically wealthy.
So he decides to self-insure and so do most of his wealthy clients.
Well, that wraps up our conversation with Scott as well as probably all the LTC insurance talk you want for the next several years. Ha!
Any closing thoughts or comments?