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November 15, 2014

Should You Get Long-Term Care Insurance?

“Most single individuals should not buy [long-term care] insurance given the availability of Medicaid.”
This is what the Center for Retirement Research at Boston College (CRR) wrote in a new research brief. A study from the organization looked not only the chances of needing nursing home care after age 65, but also the average duration of that care. The CRR found that previous research understated the probability of ever needing care, while also overstating the average duration of nursing home care.
The response from the long-term care industry was swift and blunt. A Bloomberg article published this morning quoted the executive director of the American Association for Long-Term Care Insurance as calling the new study “irrelevant.” His reasoning, according to Bloomberg, was that most people take long-term care policies because “they want to remain in their own home.”
I’d counter-argue that the CCR’s brief gives interesting insight and its findings should be taken into consideration. Long-term care insurance helps cover the costs of assistance with daily living activities, but premiums have been rising and policies need to be chosen very wisely. Lifestyle and genetics play a role in what type of coverage you may need. An Alzheimer’s disease diagnosis, or another debilitating ailment, could result in a lengthy period of needed assistance. If this occurs, your assets could be drained, leaving you with nothing to pass onto your family. On the other hand, long-term care insurance is use it or lose it; if you aren’t able to utilize the policy’s benefits, you will be out the money you paid for the coverage.
Given this conundrum, here is a summary of what the CCR said it in its brief.
Only 13% of single individuals buy long-term care insurance. This low rate of adoption exists despite the large potential costs of long-term care. The CRR says that a semi-private room in a nursing home cost $81,030 in 2012, while home health care averaged $21 per hour. Medicare only picks up some of these costs. Medicaid will cover much of the cost, but only after a person’s assets have dwindled enough so that he or she passes the means test.
Only 44% of men and 58% of women will ever use nursing home care. Among those who do use nursing care, 50% of men and 39% of women will not have a stay exceeding three months. Many of these short stays may be covered, at least in part, by Medicare.
Given this, and the backstop of Medicaid picking up the costs after a person's assets have been exhausted (“the Medicaid crowd-out”), the CRR concluded that an informed, rational person would not buy long-term care insurance.
Since medical costs are a wildcard, it is very difficult to accurately plan for them. One thing you can do to help plan for potential outcomes is to periodically have your memory and cognition skills tested. Because cognitive impairment alters your view of what normal is, you may not realize that you are being adversely affected. The Ohio State University has a Self-Administered Gerocognitive Exam, or “SAGE” for short, designed to test how well your brain is working. You can take the test and bring it into your physician for review. Even if you don’t have any problems, taking the test on an annual basis can provide a benchmark to measure your future skills and abilities against.
The Week Ahead
About 25 members of the S&P 500 will report earnings next week. Included in this group are Dow Jones industrial average component The Home Depot (HD) on Tuesday, and fellow retailers Target (TGT) and Lowe’s Companies (LOW) on Wednesday.
October industrial production and the November Empire State manufacturing survey will be released on Monday, both leading off the economic calendar. Tuesday will feature the October Producer Price Index (PPI) and the National Association of Home Builders’ November housing market index. October housing starts and building permits and the minutes from the last Federal Open Market Committee meeting will be released on Wednesday. Thursday will feature the October Consumer Price Index, the November Philadelphia Federal Reserve survey, October existing home sales and the November PMI manufacturing index flash.
November option contracts will expire on Friday.
About The Author - Charles Rotblut, CFA is  the VP and Editor for American Association of Individual Investors (AAII).  Charles is also the author of Better Good than Lucky.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Should You Get Long-Term Care Insurance? Rating: 5 Reviewed By: Econ Matters