Who Needs Long-Term Care Insurance?

Last time I gave an overview of long-term care (LTC) insurance.

That post covered basics like what is LTC insurance, how likely is it that you’ll need it, and what are the costs on both sides (cost of care and cost of the insurance).

This time we’re going to focus on who might need LTC insurance, the issues to consider, my thoughts, and what we’re doing.

Let’s get started…

Who Needs Long-Term Care Insurance?

Now that we all have a good feel for the topic, let’s get to the heart of the issue: who needs LTC insurance?

Obviously each individual is different with their own personal goals. As such, there’s no way to answer the question for everyone’s specific needs.

The best advice, like almost all financial advice, is to develop your own goals and plans and from there determine whether LTC insurance is or isn’t for you.

That said, I’d at least like to offer some direction.

To that end, I have always thought there was a general rule-of-thumb that covered the issue for most people.

It went like this:

People on the low and high net worth ends didn’t need LTC insurance while people in the middle do.

Apparently, this is still a thing.

No LTC Insurance for the Ends

Like last time I’ll share the wisdom from various sources and add my comments along the way.

Let’s begin with Forbes:

The conventional wisdom of financial planners on whether to buy long-term care insurance is this: If you’re wealthy enough to self-insure, you should. If you’re poor, you can expect Medicaid to pay your long-term care costs. But if you’re in what The SCAN Foundation Chief Executive Dr. Bruce Chernof calls “The Big Middle,” that’s when you need to decide whether to buy or to just count on your savings and good luck to see you through.

From Kiplinger:

Wealthier people — those with financial assets of perhaps $2.5 million or more — may decide to forgo insurance. This affluent group can cover care costs — and given the relative rarity of long nursing-home stays, their heirs will generally be better off if they don’t purchase insurance, says Anthony Webb, senior research economist at the Center for Retirement Research.

People with more limited assets shouldn’t purchase long-term-care coverage if the premiums are not well within their budget. “If you’re not comfortable that you can continue the premiums indefinitely, you shouldn’t be buying,” says Claude Thau, a long-term-care insurance consultant in Overland Park, Kan.

From AARP:

If your assets are few, you may eventually be able to cover LTC costs via Medicaid, available only if you’re impoverished; if you have lots of money saved, you likely can pay for future care out of pocket.

From the Motley Fool:

Indeed, given that long term care insurance primarily protects your estate from Medicaid seizures, it typically only makes sense to carry that insurance if you have a decently positive net worth.

At the upper end of the net worth scale, if you have sufficient net worth, you can self-insure by setting aside a pool of money to cover the cost of any long term care you may need in the future. You see, according to Genworth, the average annual cost of a nursing home room is around $85,776 per year for a semi-private room or $97,452 for a private room.

And according to the American Association for Long Term Care Insurance, only about 12% of people stay in nursing homes for more than five years. Further, a typical stay is generally shorter if you’re married than if you’re not, likely reflecting the fact that one member of a couple often functions as a caregiver for the other as they age, delaying the need to move to the nursing home.

So, given that an ordinary couple is unlikely to spend more than about $1 million on long term care ($100,000 per year x 2 people x 5 years per person), insurance looks less worthwhile if your net worth is beyond $2 million, especially if you’re a decent investor.

From the Bogleheads:

I recently discussed long term care insurance with a friend in the insurance business. He said to me that anyone with a net worth of $2.5-3 million should not buy one of these policies.

I had a similar discussion with a financial planner (CFP). He put the number at about $2M. Above that you can self insure. Certainly that is an opinion, and certainly no one knows the future. I find it interesting that the numbers were in the same ballpark.

$2 million per couple is cutting it pretty close. I could see $2.5 million per individual.

From Morningstar:

I find that investors seek out a specific asset threshold to help determine whether they could self-fund long-term care costs rather than buying long-term care insurance. In my early days of focusing on retirement planning, $1.5 million was often asserted to be a “safe” asset threshold for paying long-term care costs out of pocket. More recently–no doubt in light of the fact that we’ve seen long-term care costs trend up more rapidly than the general inflation rate–that figure has crept up to $2.5 million.

I think it makes more sense to size up the long-term care need on its own: the likelihood that you’ll need long-term care, how much it’s apt to cost and for how long, whether you’d receive that care at home or free up your home as an asset to pay for it, and so forth. Armed with an understanding of those costs, you can then look at whether your portfolio, factoring in both the long-term care costs and all other expenses, is up to the job.

Ok, so it looks like there is some consensus on the rule-of-thumb. If your assets are above $2 million (or $2.5 million if you want to include a margin of safety) it looks like self insuring is the way to go.

If your net worth is very low, there aren’t really many assets to protect anyway and LTC insurance is likely an expense you can’t afford, so why not let the government pay for it?

How Low is Low Enough?

I looked for a reference to find an exact number for the low-end guideline and ran into this report which says:

There’s a wealth “sweet spot” at which LTC insurance significantly improves the probability of sustaining retirement spending.

For the typical family of modest wealth (below the sweet spot), there’s a high risk of portfolio exhaustion should they become subject to an expensive end-of-life event, regardless of whether they have insurance.

At the other end of the spectrum, families with substantial wealth (above the sweet spot) can self-insure. They’re likely to be secure financially and leave an inheritance regardless of insurance.

It’s in the middle bands where LTC insurance becomes a potentially value-added proposition.

In Los Angeles (an average-cost market), there’s an improvement in the odds for couples with between $1 million and $6 million in liquid net worth. In Manhattan (a high-cost market), the range for couples is $3 million to $12 million.

Wait! Los Angeles is an average cost market? I don’t think so.

According to Best Places, Los Angeles is 73% more expensive than the average U.S. city.

If you take the $1 million to $6 million and adjust it down by 73% for the average, you get $270k to $1.6 million.

A few other opinions…

From Investor Junkie:

If your net worth is less than $500,000, then forgo LTC insurance, as you will likely qualify for Medicaid or some other sort of assistance.

If your net worth is over $2 million, the conventional wisdom is to self-insure your long-term care needs.

From NOLO:

Nonetheless, there are some people — for example, those who have assets worth $300,000 to $500,000 above and beyond the value of their homes — for whom LTC insurance may be a sound idea. This is particularly true if LTC insurance is viewed as a safety net rather than as a financial investment — and if your policy includes coverage for assisted living facilities.

So if your house is worth $400k, this would put the range at $700k to $900k.

$700k seems too high for me and $900k too low based on what the others are saying.

From Advisor News:

“In general, it’s a great idea, and a great hedge, for people between the ages of 50 and 75 with a liquid net worth between $500,000 and $5 million,” said Lawrence Sorace, a wealth manager with Mulberry Lane Advisors in Matawan, N.J.

He’s a wealth manager, so he’s prone to estimating as low as he can go on the low end and as high as possible on the high end to include as many people as possible in the “I need to buy LTC insurance” middle.

So I read this as “$250k to $2.5 million” in reality.

The information is a bit scattered and hard to find (especially on the low net worth end, but I think the $500k to $2.5 million range is more than generous. If anything, the truth is probably more like $250k to $2 million.

But as I said above, personal finance is personal and what you feel comfortable with might not be what someone else is comfortable with. So if you’re outside this range on either end, you still may want to opt for LTC insurance.

Medicaid Qualifications

Just to be clear, if you’re on the low end of net worth, are working to get Medicaid to pay for LTC, and are moving your assets to both protect them as well as qualify, you need to know the government is on to you.

That said, if you have enough foresight, you can get around their hurdles.

Here are the details:

When a senior is applying for long-term care Medicaid, whether that is for services in one’s home, an assisted living residence, or a nursing home, there is an asset (resource) limit. In order to be eligible for Medicaid, one cannot have assets greater than the limit. Medicaid’s look-back period is meant to prevent Medicaid applicants from giving away assets or selling them under fair market value in an attempt to meet Medicaid’s asset limit.

All asset transfers within the timeframe of the look-back period are reviewed, and if an applicant is found to have violated this rule, a penalty period (a period of Medicaid ineligibility) will be established. This is because had the assets not been gifted, sold under their fair market value, or transferred, they could have been used to pay for the elderly individual’s long-term care. If one gifts or transfers assets prior to this look-back period, there is no penalization.

The date of one’s Medicaid application is the date from which one’s look-back period begins. In 49 states and D.C, the look back period is 60 months. In California, the look back period is 30 months. As an example, if a New York resident applies for Medicaid on Jan. 1, 2020, their look-back period extends back 60 months to Dec. 31, 2015. All financial transactions during that timeframe will be subject to review.

Examples of the type of transactions that could result in a penalty include money that was gifted to a granddaughter for her high school graduation, a house transferred to a nephew, collectors’ coins sold for half their value, or a vehicle donated to a local charity. Even payments made to a personal care assistant without a formal care agreement or assets that were gifted, transferred, or sold under fair market value by a non-applicant spouse can violate the look-back period and result in a period of Medicaid ineligibility.

And as for qualifying based on your financials, there are rules pertaining to both income and assets. Let’s begin with the income limits:

A rule of thumb for the year 2020 is a single individual, 65 years or older, must have income less than $2,349 / month. This applies to nursing home Medicaid, as well as assisted living (in the states which cover it) and in-home care when this is provided through a state’s HCBS Waivers. (HCBS stands for Home and Community Based Services).

Income limits (for nursing home Medicaid and HCBS Waivers) are not as straightforward for married applicants. Generally, married couples’ incomes are counted separately. Therefore, the income of a non-applicant spouse is not used in determining income eligibility of his / her applicant spouse, who is able to have up to $2,349 in monthly income.

Furthermore, the non-applicant can be allocated some of the applicant’s income to enable him / her to continue living at home when his / her spouse goes into a nursing home or receives HCBS through a Medicaid waiver. This is called the Minimum Monthly Maintenance Needs Allowance (MMMNA).

In 2020, in most states, the maximum amount of income that can be allocated to a non-applicant spouse is $3,216.00 per month. For married couples in which both spouses are applicants, in most states, in 2020, each spouse is allowed $2,349 / month or a combined income of $4,698 / month.

And for assets:

The Medicaid asset limit, also called the “asset test”, is complicated. There are several rules of which the reader should be aware before trying to determine if he / she would pass the asset test.

First, there are “countable assets” and “exempt assets”. In most cases, one’s home and furnishings are exempt.

Second, unlike income, which is sometimes counted separately, all of a married couples’ assets are considered to be jointly owned and are counted towards the asset limit.

Third, asset transfers made by the applicant up to five years preceding their application date (or 2.5 years in California) are counted. This is referred to as the Medicaid Look-Back Period, and if one is in violation of this period, they may be ineligible for Medicaid for a period of time.

In 2020, in most states, a single applicant, aged 65 or older is permitted up to $2,000 in countable assets to be eligible for nursing home Medicaid or HCBS Waivers (New York is a notable exception allowing $15,750). Aged, Blind or Disabled Medicaid usually has the same asset limit. An applicant’s home is considered exempt, given the value of his / her home equity (the fair market value of one’s home minus any debt on the home, such as a mortgage) does not exceed $595,000 (or $893,000 in some states, or California which has no upper limit on home value).

Furthermore, if a single applicant does not live in the home, he / she must have “intent” to move back into the home.

This is far from all the details but it gives you a taste of what you face if you try and get LTC Medicaid assistance.

To say it’s complex and not very forgiving is an understatement IMO.

How to Think About LTC Insurance

If we go with the net worth guidelines noted above, lower net worth and higher net worth individuals are out of the conversation at this point.

What can those in the middle do to decide whether or not they should get LTC insurance?

While reading all the posts from my last article as well as this one, I found this piece from Morningstar which gave the following six-step plan to determine how to handle LTC issues:

Step 1: Gauge the likelihood of needing care.
Step 2: Ballpark the cost of care.
Step 3. Customize based on your own situation and preferences.
Step 4: Think through a backup plan.
Step 5: See if your retirement plan can support a long-term care fund.
Step 6: Segregate long-term care assets from spendable assets.

Seems like a very reasonable step-by-step process. It’s worth a read if you are interested and think LTC insurance may be for you.

What are the Alternatives to LTC Insurance?

That said, even if you’re in the middle range, LTC insurance might not be for you.

Both the planners we met with as well as the retirement workshop planner really disliked LTC insurance.

Their main objections were:

• You may pay a ton of money and not use it. Of course, this is like almost every other type of insurance (home, car, term life, etc.) and I’m sure they wouldn’t recommend not buying those.
• Even if you get LTC insurance and need it, the insurance company will fight you every step of the way to try and minimize their costs. This seems like an indictment of the insurance industry, so how could they sell any insurance product? 😉

Now maybe they are being non-biased, expert advisors. Or maybe they’d prefer to sell you an expensive permanent insurance product instead — which is what both planners above recommended for us instead of buying LTC insurance.

So make of that what you will.

One thing they didn’t bring up (I did in one meeting) is that companies are exiting the LTC insurance market in droves (at least historically they have). What happens if you pay all your premiums for a decade and then your company decides to get out of the business? Maybe nothing and you’d still be covered, but my guess is that there would be associated hassles if this happened.

Of course there are other ways to cover the cost of any potential long-term care other than buying insurance.

In searching for LTC insurance posts I ran into this one titled Alternatives to Buying Long-Term Care Insurance. They list the following for consideration:

• Save money for long-term care
• Tap into ‘living benefits’ on a life insurance policy
• Sell your life insurance policy
• Use an annuity
• Buy a combination long-term care/life insurance policy
• Buy a short-term care insurance policy

I like thinking outside the box and thus appreciated these options.

Items #2, #4, and #5 seem to be similar (or exactly) what the planners above are recommending FWIW.

I don’t think many of these are that great, but they are worth considering if you’re seriously thinking of buying LTC insurance.

Personally if I was in the middle group, I’d try and see if I could get to the high end and self-insure.

If I couldn’t do that, I’d look at both LTC insurance policy options as well as alternatives and try to find one that I felt would work and not cost me my entire net worth.

I would try and do everything I could to avoid the Medicaid option.

My Thoughts and Plans for LTC Insurance

After all my reading and the two posts I’ve written, here are my general thoughts on the issue and how we’re handling it:

• It’s a coin toss as to whether we’ll need long-term care (basically 50/50).
• Even if we do, it’s not that likely that we’ll need it for long.
• Given this, the cost appears manageable, even if we double or triple it. In most scenarios, our income alone would cover most of the costs.

Here are the (very) rough numbers:

• Current income is around $130k and spending around $91k. 
• Non-revenue-producing assets (excluding assets like real estate and private loans, which we’d need to generate income) are $3.2 million
• Let’s say both my wife and I needed LTC at the same time (hopefully the worst case scenario) and it would run us $100k each per year ($200k total).
• Our income would likely drop as I wouldn’t be running ESI Money (though it could be sold to increase assets). Take out everything else but real estate (which our kids could run) and we’re left with $60k per year.
• At $3.2 million in assets, we’d need to withdraw $140k per year ($200k – $60k) which is a 4.375% withdrawal rate.
• As such, the combination of assets and income should last us a long time.

Now, of course, let’s say this all happens in 20 years. The cost of LTC is going to be way higher by then.

This is one reason we’re maintaining a rather aggressive asset allocation in retirement. Hopefully our assets will grow in the next 20 years.

In addition, I’m always on the lookout for additional sources of income (more real estate, dividend stocks, etc.) that could add extra (and more stable) income.

Given these factors, I think we are fine, so we won’t be considering LTC insurance at this time.

In the end, everyone needs to consider the potential impact of long-term care costs and create a plan for it — to buy insurance, self-insure, let the government pay for it, or something else.

So those are my thoughts. What’s your take on the issue? And what do you plan to do to address the potential long-term care costs you face?