Advisors Debate Value of Long-Term Care Insurance

The value of long-term care insurance is generating a fierce debate on whether it belongs in an investment/retirement portfolio.

LTCi products have endured a rough history, with early policies sold in the 1990s plagued by poor pricing models. That led to instability, with many insurers either fleeing the market, or hitting clients with exorbitant price hikes.

Today, the pricing is more cautious, but nobody knows whether the products are a good match for the ever-expanding life expectancy of baby boomers.

“Don’t buy long-term care insurance,” said Melinda Kibler, a wealth manager at Palisades Hudson Financial Group in Ft. Lauderdale, Fla. “Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance. In fact, LTCi can increase rather than reduce risk in retirement.”

LTCi is an investment that just doesn’t make sense, she added.

“It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust,” Kibler said.

Mathematics works against LTCi because most people will need long-term care eventually, Kibler explained.

“For insurance to make economic sense, the risk must be spread across a pool of participants,” she said. “With other types of insurance, only a portion of the population collects, while the others continue to pay their premiums, covering expenses paid out and keeping premiums manageable.”

Since the bulk of buyers will eventually collect, LTCi insurers will have to raise premiums, as well.

“This, in turn, will cause the healthier portion of the population to opt out, leaving a pool of less-healthy participants who all believe they will need to collect on this insurance sooner than later,” Kibler said.

'A Balanced Approach'

Instead of paying into a policy with rising premiums that may empty your retirement savings, Kibler said it’s better to plan for long-term care by saving and investing.

“The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds,” she said.

Long-term care specialists vehemently disagree with Kibler’s assessment.

“In general, it’s a great idea, and a great hedge, for people between the ages of 50 and 75 with a liquid net worth between $500,000 and $5 million,” said Lawrence Sorace, a wealth manager with Mulberry Lane Advisors in Matawan, N.J.

Not only that, but Sorace also believes that long-term care insurance is “absolutely needed.”

“Social Security is not even close to being enough to pay for the monthly cost of extended long-term care,” he said. “Medicare does not cover extended long-term care, and Medicaid only covers people who have already spent down a majority of their assets.”

Replacing long-term care insurance with a stock market-based health care savings model is a risky bet, Sorace said.

“Typically, you would need to get a 7 percent-plus return on the investment year after year to keep up with a Pacific Life LTCi policy with inflation protection.” he said.

A client could be vulnerable to market risk, he added.

For example, a 65-year-old male can get about $384,000 of long-term care coverage with a deposit of $100,000, Sorace said. By the time he is 80, his coverage would have grown to $634,000.

With a stock market plan, one would need a 10 percent rate of return, year-over-year, on an initial $100,000 investment for those 15 years.

Long-term care insurance companies paid $9.2 billion in claim benefits to roughly 295,000 individuals in 2017, according to the American Association for Long-Term Care Insurance.

Stock Market Falls Short

Some insurance specialists are more adamant that stock market savings fall way short when compared to long-term care insurance.

“Thanks to a November 2014 report from AHIP, we know how well savings performs against long-term care insurance – poorly,” said Stephen Forman, senior vice president at Long Term Care Associates in Bellevue, Wash.

Here are three takeaways, from AHIP and Forman:

• To pay for the same amount of services covered by insurance (costing $188 per month), a 60-year-old would have to set aside $1,666 per month for 22 years.
• If an individual invests the value of the average LTCi premium for 22 years, he or she would accumulate only enough to pay for six months of care. By putting the same amount into premiums, he or she could own a policy covering more than three years of care.
• Roughly 22 years of premium payments would be returned after only five months of receiving the average long-term care insurance policy's daily benefit.

Others say that many stock market-oriented money managers by nature, aren’t bullish on long-term care policies, because they could potentially thin out client portfolios, and that’s a negative outcome for money managers.

“Most money managers are not proponents of long-term care insurance,” said Nicole Gurley, founder of Gurley LTCI, in Phoenix, Ariz. “They are money managers and not
comprehensive financial planners. Their primary interest, if not sole interest, is retaining assets under management.”

That’s “quite short-sighted,” Gurley added. “What will happen to asset under management and their income when clients start liquidating assets to pay for long-term care?”

As long-term care continues to grow as a hot-button issue for aging Americans, expect this argument to grow even more heated, especially as the cost of long-term medical care continues to grow, and grow significantly.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]

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