Merritt Personal Lines Manual: Who Should Buy LTC Insurance?
For many people, purchasing LTC insurance is more appealing than the alternatives. But not everyone who is approaching retirement age is a candidate for LTC insurance. Probably the most important reason for purchasing LTC insurance is protection of assets -- so you don't have to liquidate everything you have to qualify for Medicaid. However, a person without substantial assets may not be a candidate for LTC insurance.
For example, let's say Joe and Irene Brown are both 67 years old. Their only source of income is Social Security and a small pension ($200 monthly). They rent an apartment in a senior citizen complex, have a very small amount of life insurance (enough for burial) and usually maintain a savings account balance of no more than $1,000. They have no other assets, other than personal possessions and an automobile.
Are Mr. and Mrs. Brown prospects for LTC insurance? Probably not. First of all, it's doubtful that they could afford the premiums, based on their relatively small retirement income. Secondly, they have no assets of any consequence to protect. They do not own a home, have a large savings account or have other investments. However, they probably are eligible for Medicaid benefits, should they be forced into a nursing home.
Let's consider another example: Jim, age 64, will retire in a year. When he does, he and his wife will have a monthly income of $3,000 from Social Security and Jim's pension, as well as his wife's pension. They plan on selling their home and buying another home in Florida. In addition to their Florida home, Jim and his wife have a $5,000 savings account, Certificates of Deposit valued at $30,000 and some stock investments with a current market value of $50,000.
Jim and his wife certainly have assets to safeguard from the impact of nursing home expenses. If there is a real possibility that their assets would be exhausted or reduced to an unacceptable level, then the purchase of LTC insurance may be a viable alternative.
When it comes to the decision to purchase LTC insurance, the actual probability of confinement in a nursing home doesn't have to be high, but the potential loss of being uninsured must be severe -- i.e., the loss of personal assets.
How severe a particular loss will seem is a relative thing. For instance, a wealthy individual may not view the loss of $50,000 to $100,000 as severe.
Example: Ralph will be retiring soon and permanently relocating to Hawaii with his wife, Lenore. His total retirement income will be $10,000 per month. He is selling his business and a summer home. His total assets, including stock holdings, will total nearly $3 million.
Would Ralph be seriously affected by a loss of $100,000 due to expenses incurred as the result of nursing home confinement? Probably not.
In this case, Ralph doesn't really need LTC insurance. He is, in essence, self-insured.
The question "who should purchase LTC insurance?" can be answered rather simply: Anyone who stands to lose an unacceptable amount of personal assets due to a confinement in a nursing home.
How much does long-term care actually cost? LTC expenses can be defined as the excess daily cost of long-term care over the average daily cost of non-long-term care.
Example: George, age 74 and his family are considering the possibility of admitting him to a nursing home. It is estimated that his food and rent expenses currently average $50 a day. A nursing home charges $70 per day for room and board. So, the actual LTC expense is $20 per day. Accordingly, George's personal assets would be depleted at the rate of $20 per day.
How long will George be willing to reduce his personal assets to meet the costs of the nursing home? Of course, the answer will depend on the value of these assets. If George has hundreds of thousands of dollars, then a depletion of $20 per day may be inconsequential. On the other hand, if George only has hundreds of dollars, a $20-per-day reduction in assets is significant.
The smaller the amount of personal assets at risk, the less likely you will need (or be able to afford) LTC insurance.
As a rule of thumb, if you have liquid assets of $25,000 or less, you probably are not a prospect for LTC insurance. You may already be at the asset level required for Medicaid payments.
If you have liquid assets ranging from about $25,000 to $250,000, you are the most likely candidate for LTC insurance.
If you have liquid assets in excess of $250,000, you probably can cover the costs of a nursing home on your own.
So, the critical question isn't, "Can I afford to buy LTC insurance?" It's "Can I afford not to buy LTC insurance?" Some people are either too poor or too rich to need the coverage; but most Americans fall into the middle category that does need it.
