Should You Purchase Long Term Care Insurance? HINT: Don't Believe What You Read in the Paper
The Wall St Journal, in its Personal Finance section, recently asked two ostensible experts to take opposing sides in answering the question “Should You Purchase Long-Term Care Insurance?’ In my 20+ years as a Financial Planner, I can't think of a financial product for which there weren't both pros and cons and it always comes down to whether it's appropriate for a particular situation or person. This is certainly true for the decision whether to purchase long-term care insurance but I was taken aback by the ignorance displayed by a Prescott Cole, senior staff attorney at California Advocates for Nursing Home Reform, who argued against purchasing long-term care insurance.
I normally restrain myself in responding to misinformation or just silly things I read about in the media, particularly as it relates to financial planning (after all, I do have a life to attend to), but this was one of these instances where I just couldn't resist. My response follows below the link to the article:
From: Robert Wander
Sent: Monday, May 14, 2012 1:59 PM
Subject: Should you purchase long term care insurance?
Mr. Cole displays a shocking ignorance about the basic concept of insurance, which he gives away in the first sentence when he says "buying insurance is basically gambling."
No, that is most definitely not why you buy insurance but rather exactly the opposite: buying insurance is for the purpose of transferring a risk that one would otherwise bear on one's own to a company that is in the business of managing such a risk. Similarly, you do not, to use his words, "hope that you come out ahead," other than in the sense of gaining peace of mind. You don't hope that your house burns down just so you can submit a claim and you presumably don't hope that you become so infirm that you need long-term care just so you can feel good about all the premiums you've paid. Far better to not lose your home or your health.
Mr. Cole then goes on to cite statistics to the effect that only 6% of those admitted to nursing homes are there after more than two years and only 3.7% of seniors alive today are currently in such homes, which he somehow thinks makes the case against the efficacy of long-term care insurance. This completely ignores the fact that virtually all seniors who have a choice prefer to stay in their own home for as long as they can, and most long-term care policies provide for such a benefit.
He then uses an utterly false analogy to hypothesize that because fire insurance costs less than long-term care insurance, the latter is therefore "not a good deal," ignoring the fact that houses burn down with dramatically less frequency than people require long-term care. He further posits that because two-thirds of nursing home stays are for less than 90 days, lowering one's policy costs by having an elimination period of 90 days or more is only to the insurance companies' advantage by reducing the likelihood of their paying a claim. Well, HELLO, that's how insurance works: for many people, having to pay for a few months of care might be unpleasant but not bankrupting; it's the long-term claims (ergo "long-term" care insurance) for which one needs to pay a company to take on that risk.
Finally, the article suggests that consumers simply set aside savings for long-term care instead of purchasing a policy. How this would protect someone if they needed care sooner rather than later is a mystery and, furthermore, the reality is that very few people have the discipline to earmark funds for such a purpose on a consistent basis.
The irony is that there are indeed risks in purchasing long-term care insurance that go completely unmentioned, most notably, that premiums are not guaranteed over the life of the policy. In fact, many carriers have in recent years repriced their existing policies upward, partly due to low interest rates on their investments but, in no small measure, because claims have been much higher than they anticipated.
In sum, it's fine to debate the pros and cons of a financial product such as long-term insurance which, as with most, have their advantages and disadvantages but let's at least begin with a basic understanding of fundamental concepts such as the purpose of insurance; otherwise, you have no business advising others.