Taking Care of Mom and Dad: Should Your Parents Buy LTC Insurance?

Not everyone over 65 is necessarily a candidate for LTC insurance. Insurance companies and agents have been criticized for selling LTC coverage to people who do not need it -- either because they can't afford it or because they don't have enough assets to protect.

If your parents are having trouble meeting their other financial obligations -- utilities, food and medicine -- they probably don't need LTC insurance. If their sole source of income is a relatively small pension and they have minimal financial assets, they may already be eligible for Medicaid reimbursement of LTC expenses.

One rule of thumb for whether your parents need LTC insurance: If they have enough wealth that they may have to pay estate taxes -- and they don't want that money going to a nursing home -- they should have LTC coverage.

In 2003, estates will be taxed at the federal level if they're worth more than $1 million. So, if your parents' estate (including all cash, investments, real estate and other assets not transferred to a trust or other vehicle) is worth more than $1 million, you can argue that they need LTC insurance. If they're within 20 percent of that number, they may need it. If they're way below half, they probably don't need it because they don't have an insurable risk (meaning enough money to make the LTC insurance premiums worth paying).

There's another way to look at LTC insurance. If your parents have a lot of money -- an estate worth substantially more than $1 million -- they might be able to pay any nursing home costs out of their pockets without much worry. This is the "selfinsurance" argument.

Self-insurance makes sense sometimes because LTC policies have strict maximum coverage limits. Once those limits are reached, Medicaid is supposed to take over. If your parents buy a policy, use it to its maximum and then have too much money to qualify for Medicaid, they are going to have to pay out of their pockets, anyway.

The pricing models of nursing homes are designed to eat up old people's wealth. In most cases, the homes will have various rate schedules. These usually include:

• a monthly rate for patients paying cash;
• a monthly rate for patients who have LTC coverage; and
• a special rate that combines some form of lump-sum payment with a smaller, monthly maintenance fee.

The last option is usually designed to wipe out the patient, financially and then sustain care on Medicaid's relatively small LTC allowance. Depending on the facility, that lump-sum payment (also sometimes called a contribution, endowment or honorarium) can be several hundred thousand dollars.

If your parents have some money -- but aren't billionaires -- LTC insurance can provide cost-effective protection. Assume that your 65-year-old mother buys an LTC policy, paying a level premium of $1,900 for 15 years. At age 80 (the average age at which LTC services are required), she will have paid $28,500 in premiums for $500,000 worth of home-care and nursing home benefits. This results in a 17.5-to-1 value ratio.

What other investment might your mother consider with a return of better than 15-to-1? Of course, if she reaches age 80 and hasn't used the insurance yet, the value ratio begins to go down. But it's hard to complain if she gets to 80 and is still in good health.

The high value ratio of LTC insurance takes away some of the economic argument for self-insurance. LTC policies become more cost-effective as the benefit increases. So, if your parents buy LTC coverage at all, they should buy enough to protect their entire estate.

One caveat about LTC coverage: Unlike life insurance, LTC insurance doesn't usually reward your parents for buying early.

Most insurers offer policies beginning at age 50 (a few, as low as age 40). Most policies are guaranteed renewable but the premium is not guaranteed; this means it can go up each time the policy is renewed. So, if your mother buys a LTC policy when she's 50, she'll get a low premium. But, when she renews at age 65, the rate will increase -- and she might have trouble paying it when she's 66.

Insurance companies defend the rising premiums as actuarially necessary and point out that the 10- to 15-year terms of most LTC policies give people time to budget for the increasing expense.