Myths about Long-Term Care Insurance

This article is a reprint from the Financial Planning Association.

The decision whether to buy long-term care (LTC) insurance has long been shrouded in misinformation and myth. A classic example of this, cite proponents of LTC coverage, is a November 2003 article in Consumer Reports, which claimed that LTC insurance "is too risky and too expensive" for most people. Below are several of the myths that proponents say were perpetuated in the article and elsewhere, and why they believe LTC insurance is something many households should own.

Why pay for insurance you may never need? People pay for medical insurance, auto insurance and homeowner's insurance, and yet they hope they will never need to use those policies. Why view long-term care insurance any differently? Approximately four in ten Americans will need long-term care during their lifetime--a far higher risk than the need for homeowner's insurance.

Don't buy coverage if your family can care for you. You can't be assured your family can or will care for you should the time come, and even if they do, it could be a major financial hardship on them.

You don't need coverage if you're affluent. Affluent people (Consumer Reports uses a net worth figure of $1.5 million) carry all types of insurance, such as medical and homeowner's, even though they could "afford" to pay expenses out of assets--mainly because the cost of insurance is far cheaper than the potential high cost of a loss, such as multiple years in a nursing home.

Wait as long as possible to buy LTC insurance. The myth here is that people don't typically need long-term care until they are in their 70s and 80s, so why pay for years of "wasted" premiums by taking out LTC insurance when you're in your mid 50s, an age recommended by many financial planners?

First, this ignores the fact that you may need long-term care well before your 70s--think of actor Christopher Reeves.

Second, the longer you wait, the more likely you'll be rejected for coverage for health reasons. The Consumer Report article recommended not buying coverage before age 65, yet the article noted that one in four 65-year-olds "flunk the physical" (as do one in three 75-year-olds). The magazine recommended buying coverage before age 65 only if you have a chronic condition, such as diabetes--but critics point out that if you have a chronic condition, you're likely to be turned down for coverage.

Another consideration is that the cost of premiums rise the older you are, and the total lifetime cost of premiums is actually higher the longer you delay before buying a policy.

Policy features become outdated. Another argument for delaying the purchase of LTC coverage is that features become outdated as new systems of care emerge, such as assisted living in recent years. Proponents argue that this ignores the "alternate plan of care" feature contained in good policies, which is intended to cover yet unknown long-term care technology. Also, some policies automatically incorporate new features in existing plans at no additional charge. And in some cases, "new policies" are more expensive and less desirable than old ones, say some proponents.

A three- to four-year benefit is sufficient. Buying a less-expensive policy that only pays three to four years instead of lifetime may be better than not buying a policy at all, but remember, the primary function of insurance is to protect against a financial disaster, such as a lifetime of LTC.

The LTC insurance industry is unstable. Some carriers have dropped out of the business because it wasn't profitable for them (they're still obligated to service existing policies). Other carriers have dramatically raised premiums on older versions of policies, thus putting those policyholders in the tough position of trying to pay higher premiums at a time they may not be able to afford them.

Proponents concede that this relatively new industry has struggled in properly pricing policies, though many companies have had excellent track records. But they argue that large rate hikes should abate with the recent adoption by many states of model LTC insurance regulation and as the industry learns from its mistakes. You also can avoid hikes during retirement, when you might not be able to afford higher premiums, by paying off a policy through a "limited pay" option.

The key, say proponents, is not to ignore this critical insurance, but to find the right policy with the right features for you.