Thursday, November 14, 2013

Why People Don’t Buy Long Term Care Insurance



70% of baby boomers turning 65 this year will need long term care services and supports at some time during the remainder of their lives. 20% of them will need care for five years or more. In addition to the enormous physical and emotional burdens placed on the care recipients and their families, the financial costs can be staggering.  
Long term care costs are generally not covered by Medicare. Most seniors are uninsured for the costs associated with the long term care they will probably need. Long term care insurance can help cover those costs and help families avoid financial catastrophe. But only about 10% of the population purchases long term care insurance.
Given the risks, why don’t more people purchase insurance to cover their likely need for long term care?
In the December issue of its MoneyAdviser newsletter (subscription required), Consumer Reports describes the results of a survey of 298 of its readers who were asked why they haven’t purchased long term care insurance (LTCI). 
Consumer Reports readers are likely more financially aware of their risks than the general public, which makes the results particularly interesting. Here (in descending order) are the main reasons given for failure to purchase LTCI coverage:
36% - It’s too expensive  
30% - I plan to pay for my care out of savings if I need it
10%  - I haven’t gotten around to getting one yet
9% - I don’t think I need one
2% - the policies are complicated
1% - It’s too scary to contemplate
1% - I don’t know what it is.
The remaining respondents gave other reasons.
These responses don’t provide much hope for a significant increase in the private purchase of LTCI policies.  The policies have been getting much more expensive lately, so the “it’s too expensive” group is likely to grow. And planning to pay for care out of savings may make sense as a strategy for some people.   
An accompanying article in MoneyAdviser quotes an expert as suggesting that “[t]he cost may make the policies too expensive for people with a net worth (not including their home) of less than $250,000, while households with more than $1 million in assets may find it more cost effective to pay for their care out-of-pocket.”    
A market defined by people with net worth between $250,000 and $1 million (not including their homes) is pretty constrained. This all suggests that the market for private LTCI will remain limited in the future.
The recent Commission on Long Term Care could not come to agreement on how to finance the long term care needs of our aging and disabled population. But five members of the Commission did issue an Alternative Report which included their recommendations on meeting the financing challenge.   
The Alternative Report suggests that private LTCI will continue to have only a minor role in financing long term care in this country.  
The high costs, limited value and uncertainty of private LTSS insurance limit its scope. Analysts estimate that improvements in the marketplace would, at best, leave eight in 10 Americans without insurance protection. Tax policies that some advocate to subsidize these policies would disproportionately benefit the better off. And, without substantial regulation, policies would likely fail to provide adequate protection when purchasers need care.
Instead the authors of the Alternative Report recommend creation of “a public-private financing arrangement that truly spreads risk. That arrangement has room for, but cannot rely upon, private insurance as its core. To spread risk across the broadest population, social insurance must be the foundation of future policy.”
While a broad social insurance program may be a sensible way to meet the financial challenge of our society’s long term care needs, the current political realities seem to make the idea dead on arrival. We cannot expect any truly significant change anytime soon.
Without effective private or public insurance in place, it’s a scary future for those of us who will someday need long term care. And that is most of us.  
Further Reading:
A Comprehensive Approach to Long-Term Services and Supports (Long-Term Care Commission - Alternative Report. September 23, 2013)

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