How NOT to "Fix" LTC Insurance

One size does not fit all.

That bit of common sense seems to fly out the window when anyone starts commenting on how to "fix" anything, especially, complicated, dynamic problems like financial planning, retirement planning, investing and insurance.   A new opinion about how to make LTC insurance cheaper and more effective is getting widespread attention thanks to an editor at the Wall Street Journal.  

Quoting from a column in Financial Planning magazine, Glenn Ruffenach (who I know, respect, and who has quoted me several times) writes:

      "...a policy with a two- or three-year elimination period — and benefits that subsequently cover as much as five or 10 years of care, if needed — would be more effective, [the author] says.

      "'With an elimination period that high, even the average stay in a nursing home will fall within the deductible period; the actual probability of ever having a material claim against the long-term care insurance would fall dramatically,' [the author] says. 'That’s good, as it means the cost of coverage could fall significantly, while policies could simultaneously have richer benefits (after the elimination period) and do a better job of insuring against extreme events when they occur.'"

There are two significant errors in this concept:

• One, that a one-size-fits-all approach is appropriate for any complex financial transaction, be it investing or insurance planning.  Looks great in theory, on paper, and may fit some people, but is not practical for all.  Many people want and need first-dollar (or 91st day) coverage to protect a spouse's or family's current lifestyle from the immediate, monthly costs of professional care.
  
• Two, he misuses selected statistics to prove his theoretical concept.  His discussion, and stats, remain primarily focused on nursing home care, which most people don't want and will actively work to avoid until the very end of life, so length of care in a nursing home is irrelevant until other options are considered first.  Financial consequences of a care event begin when a family tries to keep a loved one at home, or in a home-like setting like assisted living.  And I would argue that even a 91-day LTC event is a much lower probability than suggested or assumed.  The AALTCI which the article cites says that the actuarial odds of a LTC policyholder with a 90-day elimination period collecting at least one dollar is about 35%. The stats that claim LTC is a 50%, 65% or even 70% risk count much lower impairments than would trigger a LTC policy - like help paying bills, driving, cooking meals, and housekeeping. Those are the services for which we should self-insure, not $3000 to $5000/month for part time home care.  
  

While it is true that LTC insurance is less expensive with a longer Elimination Period - essentially creating a "higher deductible".  And the advice that the EP should be two to three years is also reasonable IF the client can financially - and wants to - self-insure that much care out of pocket to have even longer benefits after that time.  While not common, there are LTC plans available with extra-long EPs.  

But many clients remain well-served by the typical 30 to 90-day EP with total benefits lasting only three to four years.  These shorter-benefit plans can be designed to provide guaranteed Medicaid asset protection in most states if there is a worst-case, very long care event.  And many people rightly realize that long-term care planning with well-designed LTC insurance coverage is not about leaving money to heirs, but preserving income - and lifestyle - for others at the very beginning of a long-term care event.

Bottom line, what does a particular person or family need?  Long deductible plans are available, but "normal" 90-day plans remain financially viable for many.

Read the WSJ article by clicking here:
http://blogs.wsj.com/totalreturn/2015/01/26/a-way-to-fix-long-term-care-insurance/

You can also find it by clicking here to read it on MarketWatch.com:
http://www.marketwatch.com/story/how-to-make-long-term-care-insurance-more-affordable-2015-01-26?siteid=yhoof2

The original article in Financial Planning magazine requires a subscription to view.