Long-Term Care Insurance: Who Should Care?

When Darden Professor Samuel E. Bodily received solicitations to enroll in a long-term care (LTC) insurance program several years ago, he couldn’t help wondering if such a program would be a sensible investment. Bodily pondered whether he might be better off investing his dollars, rather than making monthly LTC insurance premiums, and then simply pay LTC costs, if they were incurred, from the growing investments.

Some degree of planning for eventual long-term care is certainly something we should all be doing — Americans today are living longer than ever before, with the U.S. Census Bureau predicting that over one-fifth of the population will be over 65 by 2040, up from 14 percent in 2012. As more and more baby boomers age into the 65 and older category, 70 percent of them are expected to require long-term care at some point in their lives, whether that care comes in the form of nursing home stays, assisted living facilities or at-home health care. Even informal care, wherein family or friends step in as caregivers for loved ones who don’t receive formal assistance, results in costs for the patient, and Medicare, despite a common assumption to the contrary, doesn’t cover any LTC expenses. An individual’s specific level and duration of required LTC is impossible to predict, while the certainty remains that the associated costs are anything but cheap, creating the potential for significant financial impacts on individuals and their families.

Considering this high probability that an individual will require LTC in some form or another, is an LTC insurance plan the best approach? Furthermore, if such insurance is the best bet for some, is the insurance good for everyone — regardless of gender, enrollment age, risk tolerance and financial background — or just a few, and how much insurance should a specific individual choose?

After Bodily discussed this dilemma and lack of public research on the topic with then-MBA student Bryan Furman (MBA ’14), the pair decided to team up to run some analyses on the complexities of the choices at hand. Using publicly available data from sources such as the Society of Actuaries and Genworth Financial (a company that  offers LTC insurance in Virginia), Bodily and Furman built a model that accounted for the LTC insurance products available (including both group and costlier individual options), the uniqueness of various individual situations and their impact on the likelihood of required care, the cost of LTC insurance (premiums), and the additional cost of LTC expenses with and without various levels of insurance coverage.

The resulting model allowed them to simulate multiple scenarios in order to establish the type and amount of LTC coverage that any individual should purchase according to his or her unique situation. Their approach assumed an individual’s LTC expenses would come first from preemptive insurance coverage and then from retirement savings.

 In their article, in the September 2016 issue of Decision Analysis, Bodily and Furman reveal the following key findings:

• A base case analysis of 65-year old individuals with a fixed initial retirement amount of $150,000 enrolled in a plan in Virginia, revealed that, except for a female enrolled in an individual (not a group) plan, those individuals are better off if they toss their LTC insurance solicitations, and, instead, exhibit the discipline it takes to put that money directly into their retirement accounts. And a female enrolled in an individual plan should take the least coverage level available. That is, in 2 million simulated trials, the average expected final holdings at death were highest in the absence of an insurance plan for males in an individual or group plan and for females in a group plan.

• The subsequent one-way sensitivity analysis allowed Bodily and Furman to apply a number of key variables to the study, including age, initial retirement amount, risk tolerance, investment rate of return and projected LTC cost increases. The biggest sensitivity effect comes from risk tolerance and age, and findings were similar for both men and women, as well as individual and group plans. If anyone should buy LTC insurance, it would be those with low risk tolerance and those who can buy insurance relatively early (45–55 years of age). It is likely late for individuals aged 65 or older to acquire LTC insurance; they are better served putting money into their IRAs.

A big driver for the lack of value in LTC insurance? The possible return on investment in these insurance plans is limited by most plans’ coverage cap of three to five years. In extreme health situations such as Alzheimer’s or immobility, for instance, that limited time frame of covered care is simply too short, especially for females who tend to live longer and have higher needs for LTC.

As a result of these plan limitations, Bodily and Furman urge insurance companies to rethink their LTC product offerings going forward. Insurance is, after all, meant to cover those truly catastrophic, costly events that plague only a few individuals, but the current coverage caps in available plans fail to address such catastrophes. Insurance companies might consider policy innovation such as some combination of life and LTC insurance plans.

While there may be situations in which LTC insurance is the optimal choice (younger individuals with low risk tolerance and low retirement savings), the optimal choice in most situations is to have the discipline to put away money in retirement investments in lieu of LTC insurance premiums.

Samuel E. Bodily co-authored “Long-Term Care Insurance Decisions,” forthcoming in Decision Analysis, with Bryan Furman.