Even a casual search on the internet churns up a plethora of articles that both laud and vilify long term care insurance policies and companies. On the one hand, the high cost of care (home health care, nursing home or assisted living) in conjunction with current laws mean that most of us have to do something to cover this cost or risk going bankrupt in our senior years to pay for health care. On the other hand, the product is not the cheapest insurance you will ever buy. Combined with the rate increases long term care insurance policy holders have seen in the last few years and the challenges families can have at the point of claim, it is no wonder that there are articles panning this product. As always, the truth for this product lies somewhere between the two extremes…. This is the first in a 3 part series that will address 3 simple questions: (1) why buy, (2) what to look for, and (3) how to get a claim to pay.
The Up Side: Why We Need Long Term Care Insurance Policies
Since Health Care Reform became a reality, everyone is wondering, “How is this going to work?” Because the changes have been so far reaching, many people think the new Health Care Reform (commonly called “Obama care”) may actually eventually address this very real need. In my expert opinion, nothing could be farther from the truth.
First, the current health Care Reform has nothing in it that addresses long term care costs. In the early stages there was a small piece that attempted to do this (called the CLASS ACT) – but it has since been eliminated because it wasn’t found to be actuarial sound, meaning it had both demographic and economic problems that appear insurmountable.
It’s math, for one thing… The average cost of care in the USA today (AALTCI data) is $60,000 annually to $75,000 – the variance is geographical with some areas being much higher than others (see the Cost of Care map at www.longtermcare.gov for current survey data by state). The current estimates are that these prices will double every 15 years with inflation at 5%. The table below identifies the projected cost of care. For the average 50 year old today whose life expectancy is in the 80s, the cost is expected to double twice by the time that person needs care. If the cost is 60K today, by age 65 it would 120K and age 80, it would be a mind boggling 240K per year to pay for a nursing home [Figure 1].
|AGE||Cost Now Per year||Annual Cost in 15 years||Annual Cost in 30 years|
|50||60,000||120,000 (at age 65)||240,000 (at age 80)|
|60||60,000||120,000 (at age 75)||240,000 (at age 90)|
|70||60,000||120,000 (at age 85)||240,000 (at age 100)|
The numbers grow exponentially. For those who think this is an unreasonable expectation, I would remind them at how fast the price of milk or gas has gone up in their lifetime. This doubling rate, if anything, is on the low side.
Data suggests that 95% of seniors will be in care less than 3 years and 97% less than 5 years. So, on math alone, we have to plan a minimum of $360,000 per person to pay for the costs of care for 3 years. This does NOT include medical expense for the “in-care spouse” OR living expenses for a well spouse who is still maintaining a home (not to mention his or her medical expense!). When tallied up, the real estimate is that most individuals need to have roughly $750K set aside to cover the costs of medical and personal care as they age – and couples need 1.5 million plus.
If we expect the government (which really means tax payers) to cover this cost, we have to be prepared for what this will mean in the form of tax increases and/or debt increase. This is where the math becomes an economic thing.
So it’s an economic thing, eh…?
Yes. The Baby Boom generation is aging. The greying of America has not been a secret. Boomers are turning 65 at the rate of 10,000 to 15,000 per day. They are the largest generation in the US. When you roll time forward 15 years (when the cost of care has doubled by the way), these people will be in their 80s and starting to need care. We know that the generation behind them has fewer people. Fewer people, means small numbers of workers paying taxes to support the weight of need at the top of the aging bracket. To avoid going into complex formulas, let’s just ask ourselves a logic question: is it possible for a smaller number of workers to pay enough taxes to support a larger number of older people whose medical and care costs are skyrocketing with each passing year? The answer is a resounding “no”. Even today, with the Boomers not yet at their peak need, we are seeing Government programs like Social Security, Medicare and Medicaid groaning under the load. This trend has no reason to reverse itself in the near future. Until the last of the people born in the early 1960s waltzes off this mortal coil, this problem is with us. Since the problem is already severe, there is little chance that “Obama Care” is going to back up and try to redress this with government dollars. And all portents point to it getting worse not better…
What?!?! How can it be worse?!
It is the combined problem of labor shortage and medical advances. Remember that as the Boomers age, they will need care givers. Didn’t we just identify that there are fewer workers in the generation behind? Right now the medical services industry is short on care givers and this is expected to be a particularly severe shortage for folks who do direct level care like certified nurses’ assistants and LPNs or RNs. So now supply and demand kick in – short supply of workers with high demand for them always drives the price up. Add to this the fact that medical technology continues to advance — we are now able to keep people alive who once would have passed away.
Strokes are a fine case in point. 50 years ago most victims of a stroke (CVA) died immediately or shortly thereafter from complications or a second stroke. Now however, stroke victims routinely survive the stroke. That is the good news. The not so good news is we have a record number of folks that have survived a stroke, but now need care services. And this is only one disease… We have managed to slow the progression of dementia which allows family to enjoy their loved one longer, but also tends to prolong the time in care. We have new drugs and new procedures nearly each year that very nearly cure us – it is the “very nearly cure” that drives the growth in care. Last but not least we are simply living longer. If a person lives long enough they eventually need care because they are simply frail. So yes, the situation for elder health care does get increasingly worse. Since math estimates earlier in this article are probably conservative with regard to the rising costs, the long term outlook for elderly health care is distinctly worse.
So between math, economics, and demographics, this problem is just not going to go away. Insurance is the one and only hedge against this heavy cost of care for the aging. Clearly the government has shown intent that they would prefer individuals purchase an insurance product to cover the cost of this care. They have passed a number of laws since 1996 trying to give incentives to consumers to purchase their own coverage.
Since 70% of all seniors will need some long term care services before they die, the betting person should be betting on buying long term care insurance in order to cover their health care costs as they age. Yet in spite of the weight of evidence that this insurance is a smart financial move and in spite of the government’s insistence that people need to prepare for this cost themselves, we still see a low penetration in the marketplace for this particular product. The AALTCI estimates that there is less than 10% penetration of the product into the marketplace. Even with financial gurus like Dave Ramsey and Suzie Orman beating the drum that people need to buy it in their 50s and 60s, we see reticence on the part of the buyer.
Why all the hesitancy? Well, it long term care insurance isn’t cheap, it isn’t mandated (care insurance, for instance, is mandated in many states), and it has enough complexities to make people hesitate. On top of that there are plenty of horror stories of how someone paid for years but couldn’t get the insurance to pay benefit at the point of need. The next two articles will look at each of these problems: we will answer “what do I look for” and “how do I get a claim paid.”