The case for long-term care insurance goes something like this: 70 percent of all Americans will need long-term care at some point in their lives, and the average cost for a year’s stay in a nursing home is $100,000. Sounds pretty convincing, right? So why is this article entitled Long-Term Care Insurance is a Waste of Money? Read on and you’ll find out.

Not Everything is as it Seems

70 Percent of all Americans will need long-term care at some point in their lives. Really? 

330 million people live in the U.S., yet only 1.4 million live in nursing homes. That’s less than one percent. So what gives, are they lying to us? How can you explain the drop from 70 to less than 1 percent?

To answer that, a bit of insurance terminology is needed. ADL is an acronym for Activity of Daily Living. ADLs are everyday tasks like taking a shower or brushing your teeth or getting dressed. Disability is measured by the number of ADLs that a person cannot perform.

Many people need help with only one ADL. When that is the case, more often than not the long-term care is provided by a family member. The trouble is, the insurance industry includes that care with the care of those living in nursing homes. The fact is, the majority of long-term care consists of free, in-home care provided by family members. Less than 40 percent of those in need of long-term care live in a nursing home or assisted living facility.

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Another big piece of the puzzle is the fact that the majority of nursing home stays are 90 days or less. People either get better or they don’t. If they get better, they go home. If they don’t, well, that’s the other way people leave nursing homes. Only 25 percent of nursing home stays last more than a year, and only five percent last more than two years. 

Long-Term Care Insurance

The cost of long-term care insurance increases with age, as does the chance that coverage will be denied. This paradigm forces people to get long-term care insurance when they are relatively young, like in their 50s. That means they will spend decades paying for the insurance before they will likely ever need it. And it’s not cheap; the average premium for long-term care insurance is $300 per month. 

Premiums rise each year and it’s not uncommon for people to drop their policy altogether. In fact, 10 percent of policy holders cancel their long-term care insurance within the first year. Like whole life insurance, if you drop your policy you don’t get any of your money back. All the money you paid is just wasted.

If you have long-term care insurance and you actually need it, there is a decent chance that your claim will be denied. Most policies have numerous exclusions such as a 90-day exclusion period. As mentioned, most nursing home stays don’t last 90 days.

So Do I Need It or Not?

We just pulled the rug out from under the case for long-term care insurance. Namely, that 70 percent of all Americans will need long-term care at some point in their lives, and the average cost for a year’s stay in a nursing home is $100,000. The number of people who need paid long-term care is significantly less than that 70 percent figure, and those who are institutionalized probably won’t remain in a nursing home for 90 days, much less a year.

That said, the underlying intent of long-term care insurance has merit. Consider this: the odds that your home will be destroyed by fire are only 1 in 200, yet you still have homeowners insurance. What does that say about insurance? It says the decision to buy a particular form of insurance is based on the possibility that something could happen, and the extent of the consequences if it does. Losing everything in a fire is simply too big a risk to take (plus the mortgage lender requires it).

It boils down to this:

Is it possible that you or your significant other could spend years in a nursing home and completely drain your savings? 

Yes. 

Then something needs to be done about it.

A Better Way

You can pay an insurance company $300 a month for decades and hope they’ll be there if you ever need them, or you can insure yourself. If you are unfamiliar with the term “self-insured”, it means to take the money you would have given to an insurance company and invest it instead.

Let’s look at an example. On his 55th birthday Bill turned his back on his insurance company and decided to become self-insured. He began putting $300 per month in an investment account that earns a modest 6 percent return. Over the course of 30 years, he faithfully contributes to the account and it grows to $300,000. 

At the age of 85, Bill falls gravely ill. With inflation that $100,000 figure we’ve been using for a year’s stay in a nursing home has grown to $200,000. Bill’s self-insurance plan will pay for 1.5 years in a nursing home. The odds that he will stay longer than that are only 1 in 20.

If you forgo long-term care insurance, it is highly unlikely that you will end up on the streets. Medicare pays the first 100 days of long-term care, and after that if you burn through your savings you qualify for Medicaid. Medicaid pays for long-term care indefinitely.

Bottom Line

If you get long-term care insurance, odds are you will never need it. If by chance you do need it, there’s a decent chance that the insurance company will deny your claim.

Over the course of decades it is entirely possible that your insurance company will go out of business. The financial meltdown of 2008 saw titans such as Bear Sterns, Merrill Lynch, and Countrywide get tossed onto the trash heap of history.

Here’s the bottom line: you are probably better off insuring yourself. Sock away a load of cash and it will be there if you need it. If you don’t need it, you can pass it on to your heirs. Try doing that with long-term care insurance.

One final thought: this is something you should discuss with your spouse or partner. He or she is the most-affected by insurance decisions.

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