Do you need nursing-home insurance?

The question is being asked more frequently these days as nursing-home insurance is aggressively marketed by agents seeking the high commissions and high rate of retention typical of policyholders. Some agents insist that everyone needs nursing-home (long-term-care) insurance. These are the same agents that sell life insurance to toddlers. Fact is, not everyone needs it. I will describe here some basic issues that you should consider before talking to your agent about coverage. The issue of long-term (nursing home) care can be a frightening one for people as they leave middle age. They are frightened by the prospect of a nursing-home stay and the costs associated with it. They are also frightened of the relatively high cost of buying nursing-home insurance. As with old age and death, the reaction often is denial. People just refuse to deal with the issue. But it must be considered. Like any risk-management issue, the chance that we will need expensive, extensive care as we age can be handled in one of two ways: Assume the risk ourselves, or pay someone else to assume the risk. The inclination to pay someone else (an insurance company) is stronger when the risk is more financially devastating, as it is with long-term care. An annual stay in the nursing home can cost as much as $80,000 in some areas of the country. When deciding whether to buy long-term-care insurance, ask yourself these questions:

  1. How likely are you to need nursing care? The older you are, the greater the likelihood that you will need it soon.
  2. Do you have assets that your spouse needs to cover his or her living expenses, that if liquidated to pay for your long-term care would impoverish him or her? Medicare pays for very little long-term care; Medicaid (welfare) pays only after assets are substantially depleted.
  3. Do you have enough assets and income that the expense of a long-term nursing-home stay (or long-term home care) is not a concern?
  4. Can you afford the premiums?

First, I would submit that for someone younger than 55, paying premiums on long-term-care insurance is not an efficient use of capital. Certainly, premiums are lower when you are young. But it rarely makes sense to buy something just because it’s cheap. This is the approach that agents use to sell life insurance to people who don’t need it.

Second, married people have an issue that is simply not present for singles: A spouse who could be impoverished if a nursing-home stay is required. On the other hand, high-net-worth individuals and those with substantial income from pensions or other sources other than wages probably don’t need nursing-home insurance.

Finally, if you can’t afford to pay the premiums, the question is moot.

Although there are many differences in coverage provided by long-term-care insurance policies, they all come with four important variables that must be considered in light of a person’s particular needs and objectives:

    • Elimination period – How long must you be confined to a nursing home before benefits begin? Policies specify terms of from 90 days (more expensive) to two years.
    • Benefit amount – What is the daily benefit paid? The lower the benefit, the lower the cost.
    • Length of benefit – How long will the benefit be paid? Terms typically run from two years to lifetime, with the longer benefit periods requiring higher premiums.

A final observation: Long-term-care insurance is sold assuming level premiums, but there is no guarantee that your premium won’t rise. Because this type of insurance is relatively new, insurance companies are just now acquiring enough claims-paying history to assess whether premium increases are necessary. Many policyholders are surprised when they see premium increases of 15% to 30% on coverage they thought would never cost them more.