Episode 222: Is Long-Term Care Insurance Worth It Anymore?

Coverage Options for Long-Term Care

Alex Murguia 00:11

Across the types of policies, what are the coverage options available to folks?

Wade Pfau 00:19

Yeah, that's an important aspect. If you're thinking about long-term care insurance, the traditional long-term care insurance, what's really become less common, only there's an estimate out there, like 3 to 4% of people carry a policy. They became less attractive because premiums can go up over time. And that's not fun if you're having trouble affording the continuing premium increases. And then also there's this aspect, like with any insurance that you pay all these premiums if you never get to use the benefits. You kind of feel like you wasted your money, which again, that's true with any kind of insurance, not necessarily the way to frame the issue, but you've got that.

And then also this is relevant to the hybrid, like the long-term care hybrid more so on the life insurance side, there are two ways that works. One, it's really you have permanent life insurance, but there's an acceleration of death benefit rider where if you qualify for long-term care, instead of waiting to die to receive the death benefit, you can start receiving it in advance to pay for the long-term care. The other thing that's more relevant would be life insurance that combines with long-term care, but it's more driven by the long-term care where you can pay the death benefit funds the long-term care need first, but then there can be additional long-term care benefits beyond that.

Elimination Periods and Payment Processing

Wade Pfau 00:19

One of the coverage aspects that came up is the elimination or waiting period. It's once it's been determined that you have a long-term care need, how long do you need to wait before the long-term care insurance starts to pay you a benefit? Common choices are 60 to 90 days. The longer the waiting period, well, the less likely or the less benefits you ultimately receive. But that can be a way to help reduce premiums to find something that's affordable. 60 or 90 days is pretty common.

Alex Murguia 02:27

How tough of a time is it to get the insurance companies to respond and do they take it to the last day? Is it something where customer service is number one priority or does it fall prey to the, I hate to say this, how folks kind of handle hurricane insurance—you can have it but it could be three years before you get paid out?

Wade Pfau 02:50

Once the payment process starts, I don't think there's as big of issue about getting paid.

Three Benefit Payment Methods

Wade Pfau 02:50

There are a bunch of aspects we can talk about with insurance. What we're starting to dig into is how are the benefit amounts determined? There are three methods. The one that would be the cheapest in terms of premiums would be the reimbursement method, but that's also the most work. That's where you probably hear some complaints—you have to submit the receipts and then you'll be reimbursed up to the limits of the coverage. There could be some delay there and also some stress around keeping, maintaining and submitting these receipts.

The second method is the indemnity method, which is basically any day that it's been determined you needed care that day, you'll receive a fixed payment amount. There still could be an issue with demonstrating which particular dates you needed care and which particular dates you didn't need care because you do have to demonstrate there was paid care involved.

And then the third method, which would have the highest premiums, gives you the most flexibility, is the cash method. Once you're deemed to need care, you just receive cash payments after that, whether or not you received care on any particular date. That could be useful to help pay for informal caregivers, to help reimburse family or friends.

Indemnity and Cash Methods Explained

Alex Murguia 04:29

Can you explain the indemnity method and I'll ask you about the cash in a second? Just explain that timeline one more time to make sure I understood it correctly.

Wade Pfau 04:47

Yeah, so the reimbursement method is you get reimbursed for the exact costs of the receipts you submit. The indemnity method is on days that you need care, you receive a fixed payment amount. And that could be more or less than the cost of your care for those dates.

Alex Murguia 05:05

What determines the payment amount? The insurance that you bought, I would imagine?

Wade Pfau 05:08

Yeah, the type of insurance. That's a related topic. The cash method is you don't have to demonstrate you actually received paid care on a particular date. You can get paid either way. Once you've qualified and have gone through your waiting period, then you receive the cash amount.

Qualified Longevity Annuity Contracts as LTC Alternative

Alex Murguia 05:24

Couldn't I just get a deferred annuity that starts in five years paying out a certain amount and in my head say this will be towards long-term care needs?

Wade Pfau 05:55

Yeah, that's not silly. I talk about that in the book too. It's a little bit less precise, but QLACs, the qualified longevity annuity contract inside an IRA. I get a deferred income annuity that starts paying at, say, age 80 or 85. The idea is I don't know when I'm going to need long-term care, but there's some correlation. The odds are higher when I get to 85 or beyond, I might need long-term care. So I just have this annuity kicking in at the approximate time you might need it for long-term care. It's a less precise method, but it works. Late in life, I might need long-term care. Late in life, I get this annuity payment coming in. That's another way to think about it.

Alex Murguia 06:24

If you don't need it, you just reinvest. Who cares, right? But if you need it, you apply.

Wade Pfau 07:07

Right. If you don't use the qualified longevity annuity contract, that's ordinary income. You now also have income that potentially you're not going to waste your tax deduction because you need income to offset it. And if you didn't have the income at that point, you don't get the benefit of the tax deduction. So that can be a nice way to approximate. It's not long-term care insurance. It's just a way to design the annuity to probably help out with long-term care as needed.

Alex Murguia 07:53

Whether it's called long-term care insurance or not, it's serving the purpose. To me, it seems like the first option is something that's truly long-term care insurance because you're matching receipts. The next two is just a mechanism for which you get money. I would imagine because you have these qualifications that you need to qualify for long-term care, the premium is less on those than on a regular annuity because a regular annuity you're gonna get money no matter what.

Wade Pfau 08:19

Right. With the reimbursement method though, you just have to have an informal caregiver or even paid someone that you have to pay to submit receipts on your behalf. So that could be a potential downside, but that would lead to lower premiums. And so to your point, long-term care insurance is not popular with the public. So maybe you'd rather take that annuity route as a way to approximate. That's fair. No, it's definitely a legitimate approach. Use a deeply deferred income annuity as an alternative with the idea that you'll get this money at the same time you need long-term care support. So it's your informal long-term care insurance. That's absolutely a legitimate option. I do talk about that in the book.

Hybrid Life Insurance with Long-Term Care

Alex Murguia 10:29

How popular are these annuities that have the long-term care option on the rider?

Wade Pfau 10:35

Not popular. That's really been a function of interest rates. As interest rates had been so low, it's hard to guarantee any sort of yield on the annuity plus also have a long-term care benefit. You really need higher interest rates. So they could become more popular now that interest rates have normalized more, but for the most part, it's not been the annuity that's the attraction of the hybrid policies. It's been life insurance combined with long-term care.

Daily and Monthly Benefit Pools

Wade Pfau 11:47

We were going through what long-term care insurance might look like. We talked about the waiting period. The other thing is it's very rare to find permanent long-term care. There's going to be a benefit pool. It's either monthly or daily amount. There's going to be the total benefit pool. So for example, say you have a policy that has a $150 daily benefit for five years. Well, then the total benefit pool would be 150 times 365 times 5, or $273,750.

Calculating Total Benefit Pool Amount

Wade Pfau 11:47

For example, if it's daily and reimbursement, maybe on a particular day you only spent $60. You didn't spend the full $150. You would still maintain you could keep using that daily reimbursement until you used up the entire benefit pool. So that's where the total benefit pool becomes important. Because if you're using less than that amount, you can save it for later.

But then with the indemnity or cash method approaches, you're going to be getting the full daily amount each of those days. Another benefit, a monthly benefit pool instead of daily, can give you more flexibility. Suppose you're looking at monthly $4,500, which would be equivalent to a daily $150. And then suppose you have a month where you only need care for 20 days, but it's a $200 cost each of those 20 days. With a daily benefit, for each of those 20 days, you only get $150 of the $200 covered. So you're only getting $3,000 for the month. But if you had a monthly $4,500 pool, you can now get that full $4,000 covered for the month.

Monthly Pools vs Daily: Greater Flexibility

Alex Murguia 14:24

The thinking here is you're not going to need it for the full 30 days. You're going to need it for just a block of those days because, for example, your spouse is working. You need coverage during the weekday but not on weekends?

Wade Pfau 14:37

Right. This would be more of an in-home care where you don't have that paid caregiver coming every day of the month.

Alex Murguia 15:03

So you're saying the monthly benefit pool gives you more optionality?

Wade Pfau 15:07

Yes, it might cost a little more. So that's like the idea in this example where monthly $4,500, but you only used $4,000 for that month. That would just extend if you had a five-year policy. You've got an extra $500 to extend it to another month. You can carry it over. It's not like a cell phone where you lose all your minutes. For the most part, you do have to read every policy carefully. Generally, you get to carry it over, although there could be exceptions out there.

Inflation Riders and Benefit Growth

Wade Pfau 17:26

Another lever is inflation. Is it just a fixed benefit amount or will it grow with inflation? It would be really rare to find something that will grow with the CPI. It's usually maybe either a 3% or 5% growth rate and then simple or compounded. Compound, like a 5% compounded growth rate, would be incredibly expensive. So people are usually having to develop some sort of compromise, maybe 3% simple growth, something to keep the benefit growing over time. But it may be hard to have the benefit fully keeping pace with inflation. If you project long-term care costs are going to grow at 5% a year, well, you could buy a benefit that grows at 5% a year, but it could get really expensive to do that. So you usually have to make some compromise with that particular issue.

Understanding Out-of-Pocket Long-Term Care Costs

Alex Murguia 18:24

A smart way to think about long-term care is that it's not a type of insurance, like Medicare, where you're going to match expenses. It's just not going to happen. You should look at it as something where you get an estimate of what an expense will more likely be and then you're on the hook for whatever the surplus that expense actually ends up being.

Wade Pfau 18:35

Right. They could still be out of pocket.

Alex Murguia 18:50

Yeah, you're on the hook out of pocket for whatever the expense surplus is relative to the money you've got.

Wade Pfau 18:56

Right. Long-term care will not magically eliminate any out-of-pocket costs related to long-term care. You still pay what the policy doesn't cover. Hence, regards to your comment about inflation, they're going to suffer from the same ills as a normal annuity contract would because it's just too hard to price that in a manner that's cost effective for anyone really at that point. Yeah, pricing out a CPI-adjusted long-term care policy would be incredibly expensive. It's not, you don't necessarily want it because for the most part, we expect long-term care costs to rise faster than the consumer price index. So even just having a CPI-adjusted policy may not keep up with the cost of long-term care.

What Expenses Are Covered

Alex Murguia 19:56

If it seems to me that if they're just giving you effectively a cash allowance on a monthly basis, why do you even have to match anything? Why can't they just give it to you?

Wade Pfau 20:10

If you qualify that you need care, even if you're not receiving care, you'd still, the cash method would give you those payments. That's gonna make it more expensive though. But if you have a reimbursement method, then you do want to make sure you understand what they'll reimburse because they may not reimburse things. Most things will be reimbursed, like that would include things like adult daycare centers, but there could be policies out there that don't reimburse such expenses. So you just need to be careful about that.

Alex Murguia 20:57

I was just thinking about food, but it's really more not so much the materials itself but if you needed someone to cook for you or something like that as opposed to the groceries.

Wade Pfau 21:14

Yeah, you'd be paying for someone to come into your home to provide care and that care could include cooking. If that's covered while eating, that might be one of the two of the six activities of daily living. You have to demonstrate a need. It might be harder to demonstrate that need, but if you need help with cooking, you might be able to demonstrate other needs that would be easier to then make you eligible for the benefit.

Budgeting for Long-Term Care

Alex Murguia 21:47

So just to sum it up in the book, you pretty much go through what are the qualifying factors for long-term care. How likely are you to experience long-term care? Where can you get long-term care? What options do you have available for long-term care? What levers do the long-term care policies use that you can choose to pull on them or not? And then what are the coverage options available?

Wade Pfau 22:22

Yeah, that's a pretty good summary. And then the chapter ends with how to budget for long-term care. We talked about that already with our long-term care reserves estimator to help you work through those issues.

Alex Murguia 22:36

And this is the long-term care reserves estimator. Do you have a link in your book on it or do you just go through step-by-step on how to figure that out?

Wade Pfau 22:43

I show how to think about it. We do have it as a tool inside the Academy, so members of the Retirement Researcher Academy. That is our membership site at Retirement Researcher dot com. Inside the Academy, the spreadsheet, the long-term care reserves estimator, it's available for users. But otherwise, if you're not part of the Academy, I've given you a good enough explanation that if you're good with Excel, you have everything you need to create your own Excel spreadsheet.