Many financial planners maintain that long term care insurance (LTCI) is an essential purchase. Many policy makers and politicians believe that the Medicaid long term care benefit needs to be reduced and that private long term care insurance is a viable substitute for Medicaid. Let’s agree that the political issue of how to reform Medicaid is separate from the personal decision on how you should prepare for retirement. In my view, private LTCI is not a suitable investment for most individuals preparing for retirement. Furthermore, private LTCI may not be a viable product.
Many households have insufficient levels of liquid asset and insufficient savings in their retirement accounts. Studies conducted before the financial crisis indicated that only around one half of the baby generation were adequately preparing for retirement. These households need to focus on increasing their saving rate rather than divert savings towards an illiquid asset.
Comprehensive multi-year LTCI insurance with inflation protection is extremely expensive. Ironically, even most LTCI purchasers have only a few years of coverage and must rely on Medicaid for long stays in the nursing home.
LTCI almost always costs more than anticipated at the time the policy is purchased. Insurance firms cannot raise premiums on a policy simply because a person claims benefits. However, an insurance company can raise premiums on an entire class of policies if actuaries determine that the sum of premiums and investment income will not cover benefits. Premium increases, even among the strongest and most conservative firms, are now commonplace only a few years after a policy is issued.
Premium increases are in part attributable to poor investment returns and low interest rates. Perhaps premium increases will be less prevalent in the future. However, current premium increases are occurring when individuals can least afford them, when their own portfolios are down in value.
Many of the better-run insurance companies are currently leaving the industry altogether. (MetLife left the industry and I believe Prudential stopped selling on the individual market.) This is what Fitch had to say about LTCI in a recent report.
“In addition to higher than expected claims, historically low interest rates have negatively affected LTC results. We believe the long-tail nature of the product and future renewal premiums make the LTC business more vulnerable to interest-rate risk. Low rates continue to curb investment income needed to help fund LTC benefits.
We believe mispricing of the LTC product will continue to weigh on the insurers’ earnings and capital, but we note the current in-force individual LTC business accounts for less than 2% of industry reserves and premiums.”
There is one LTCI product that intrigues me. Many states participate in the LTCI partnership program. Individual who purchase a partnership policy can keep assets equal to their amount of coverage and still qualify for Medicaid.
It is highly likely that if you live long enough you will need long term care. You need to prepare. However, for most of us the purchase of LTCI is not the appropriate option. More on my views on LTCI can be downloaded on Kindle. The article can be purchased for $4.99 or borrowed for free.