LTC insurance with a long waiting period - 12 months

[capjak]

So, a quick comparison (using financial calculator apps but, fairly accurate I think, if you accept my return assumption):

Case 1-Need LTC @ age 76/75; assume both need LTC & live to 96/95 & 4% inflation.
>Self Insure= ($151k)X1.07*20=$610k => 6yrs LTC for two persons

>LTCi= 20yrs LTC for two persons [WINNER]

Case 2- Need LTC @ age 86/85; assume both need LTC & live to 96/95
>Self Insure= ($151k)X1.07*30=$1,225k => 13+yrs LTC for two persons [WINNER]

>LTCi= 10yrs care for two persons

Case 3 (actuarial averages)-Need LTC @ age 79.5/78.5; both use LTC for 2.5yrs until 82/81 (note that I used an average of male/female longevity for simplicity).
>Self Insure= ($151k)X1.07*23.5=$779k => 8yrs LTC for two persons [WINNER]

>LTCi= 2.5yrs care for two persons

I think there are a few take-aways here:

1. This kind of policy would be effective for the worst-case, catastrophic situation (early onset of a long lasting debilitating disease for one or both partners).

2. Self-insuring is the better ‘financial’ decision in almost all cases except extreme ones described by #1 above.

3. You have to have an insurance product with predictable premiums (like this one seems to be), to even begin to do a NPV/NFV comparison, and that still leaves the uncertainty on the LTC cost side.

Nice Work Houston! Thanks
If I understand correctly the assumption is at 7% return (some would have this money currently in a fixed asset I would think in order to have it available), it would be interesting to calculate what the break even %return would be for say 3 to 10 years longterm care vs the Asset based. Also the premiums are guaranteed not to increase or decrease that is what some people find attractive about the asset based LTC.

 

[capjak]

Also in Case #2 the LTC rider only pays $216,000 the first two years for two people and than it would pay $336,000 per year+ for two people forward so not sure how that would figure into the equation. so for 10 years of care for two people it would pay Total $2,688,000+

In Case #3 it would pay $356,000 based on inflation in year 25 for 2.5 years of care For the total 8 years it would pay $2,344,000

 

[capjak]

Case 2- Need LTC @ age 86/85; assume both need LTC & live to 96/95
>Self Insure= ($151k)X1.07*30=$1,225k => 13+yrs LTC for two persons [WINNER]

>LTCi= 10yrs care for two persons
Investigating further and putting a spreadsheet together I think the conclusions are not quite right:

1,225,000 30 years from now will be less than 4 years of LTC for two persons as I do not believe compounded inflation of 4% is accounted for of LTC cost calculation you made for 30 years:

assuming LTC is $4500 per month 2018 at 4% inflation it would be $14,537 per month x 2 people = $348K 1 year (2048) LTC and $15,117 x 2 =360K year 2 (year 2049) and so on for 10 years for the 10 year period.
I think this is accurate assuming my spreadsheet is accurate.


The difference is the Single premium or an investment of $151,000 is equalivent to only 1.5 years LTC in year 0. The insurance however pays infinite years of LTC in year 0 forward. Even at a 7% after tax return the $151,000 would not be enough to self insure for 2 people 10 years.

 

[athena53]

I did some thinking about this and the short answer may be "volatility".

If I offered you a flip of a fair coin, and we agreed that I'd pay you $100K if you won the flip and you'd pay me $100K if you lost, would you take it? Hey, it's a fair bet, right? Most people, though, don't have $100K sitting around that they can easily tap if they lose. Insurance companies are required to hold a reasonable amount of "surplus"- think of it as their emergency fund. The more volatile the product, the higher the required surplus as a % of premium. That's money they have to keep in conservative investments rather than using it to grow the business. I saw this on the property-casualty side of the business. Something like hole-in-one insurance (you pay the event co-ordinators if someone makes a hole in one during the event and they get a lucrative prize) is a good example. On average, the likelihood is pretty darn small but you want to charge enough to cover your expenses and the cost of putting your money at risk.

There's less volatility in pricing a product that places a cap on the company's liability (e.g. pays 2 or 3 years max). There's also less volatility with a smaller elimination period. They can be pretty sure that if you enter LTC on Day One, you're likely to be there on Day 60. Day 1,825? Who knows? If you're a female and you enter at age 80, you have a 25% chance of dying before 5 years are up. If you're still alive, the insurance company has a VERY long-tail risk to price. How much return will they make on the premiums as they invest them in the meantime? How much will mortality improve? What effect will advances in medicine have on longevity over the next 25 years? If we get better at putting cancer into remission, will more people get Alzheimer's?

I ALMOST understand why insurance companies don't want to sell us the long elimination period with lifetime LTC benefits. They don't want that risk, either, especially for the smaller premiums they'd get.

 

[Independent]

I did some thinking about this and the short answer may be "volatility".
....

There's less volatility in pricing a product that places a cap on the company's liability (e.g. pays 2 or 3 years max). ....

I agree. Insurers would rather not sell long elimination period, long benefit LTCIi policies for the same reason that health insurers would rather not sell medical care coverage with a $160k deductible and unlimited benefits.

This is especially true about LTCi because the typical form is guaranteed renewable for life. So, there is a systemic risk in care usage.

 

[Independent]

Assisted living is not the same thing as long term care.

Long term care is to cover skilled nursing and potentially a nursing home. It might cover some aspects of assistance with daily tasks, but won’t generally pay the monthly expenses of an assisted living facility. It will pay for a nursing home.

A lot of elderly will move to assisted living where they don’t have to maintain their own home/apartment or cook their own meals anymore. They just need a little help. It’s a bit more like room and board plus some supervision. I don’t believe most LTC policies will cover that.

Seniors can live in independent/assisted living for quite a long time. It’s not nearly as expensive as a nursing home or memory unit for Alzheimer’s victims. The high costs people worry about are those expensive nursing facilities.

Definitions are always hard, but if we're talking about Long Term Care insurance this is typical ....

Long term care is care that you need if you can no longer perform everyday tasks (activities of daily living) by yourself due to a chronic illness, injury, disability or the aging process. Long term care also includes the supervision you might need due to a severe cognitive impairment (such as Alzheimer's disease).

https://www.ltcfeds.com/start/aboutltc_whatis.html

Where the "activities of daily living" are typically: eating, transferring, dressing, bathing, continence, and toileting. https://www.ltcfeds.com/help/glossarylist.html?adl

Note that cooking, cleaning, shopping, and laundry, are not on the list of ADLs.

You can get help with ADLs at home, in an adult day care setting, in an "assisted living facility", or a nursing home.

My mom was in a facility with multiple levels of help. One wing was for "independent" living where people got help with cleaning and got one meal per day in the dining room.
The "Assisted Living" wing had staff who provided help with the ADLs.

Some "Long Term Care" policies only cover nursing homes, more are "comprehensive" and cover care in any of the settings above (though the daily maximum benefit may vary by setting).