Long-term care insurance: should you buy it?

Long-term care insurance covers individuals who suffer from chronic illness or disabilities that prevent them from caring for themselves. Several changes have “rocked the world” of long-term care insurance recently, forcing doctors to reconsider their coverage needs.

by John K. McGill, CPA, JD, MBA

Low interest rates, poor investment returns, and years of brutal industry consolidation have driven many insurers out of the marketplace. CNA, Conseco, Senior Health, and IDS Life are refusing to sell new policies, while TIAA-CREF has exited the business altogether. Among the remaining players, GE Financial (Genworth), MetLife, and John Hancock Financial Services are the three largest and most financially secure.

Moreover, some doctors who purchased coverage years ago have seen the premiums sharply increase recently as a result of bad assumptions made by insurers. Policyholders are living longer and making claims sooner than most insurers expected.

Insurers also failed to predict the low interest rate environment over the past seven years, which has cut into investment income. Finally, the biggest error was in overestimating the number of policyholders who would stop making payments and let their policies lapse before ever making a claim.

The industry shakeout has resulted in a steep drop in policy sales, down 25 percent in 2004. Unfortunately, the remaining companies have jacked up long-term care insurance premiums by 15 to 30 percent annually to compensate for their poor decisions.

In addition, many policyholders who cannot afford these increases have dropped their policies, with nothing to show for the thousands in premiums previously paid.

Medicaid eligibility tightened

The government (through the Medicaid program) is the payer of last resort for nursing home costs. Previously, doctors who wished to preserve assets for their families would gift assets to them in order to become “poor enough” to be eligible for Medicaid’s nursing home assistance. Under prior law, all gifts made within a three-year period prior to nursing home entry were added back to determine Medicaid eligibility.

Recently, President Bush signed a new law making it more difficult to gift assets away and thereby qualify for Medicaid-paid nursing home care. Under the new law, eligibility for Medicaid will be adversely affected if gifts are made over the prior five years, up from three years under the old rules. In addition, doctors may not qualify for Medicaid if they have home equity of more than $500,000.

Nursing home costs

Recent studies indicate that 69 percent of today’s 65-year-olds will eventually need some type of long-term care. However, for many seniors, this may simply mean help with bathing, dressing, or other simple life tasks. Yet it’s those in nursing homes who are hit with the really hefty costs.

The same studies project that 37 percent of all 65-year-olds will need long-term care in a nursing home or assisted-living facility.

Most seniors will spend less than three years in a nursing home facility, at an average cost of approximately $66,000 annually. However, 11 percent of 65-year-old men and 28 percent of women are projected to need more than five years of care in a nursing home or assisted-living facility, which could result in huge costs.

Accordingly, while 84 percent of seniors will incur long-term care expenses of less than $100,000, 11 percent will incur costs between $100,000 and $250,000, and an additional 5 percent will get hit with expenses over $250,000. As a result, some could see their life savings wiped out by nursing home costs.

Should you insure the risk?

Doctors with less than $250,000 of assets at retirement are somewhat protected by Medicaid, which is the payer of last resort. The government generally allows a married doctor to retain his or her house, car, and half of the couple’s assets up to a maximum dollar amount; however, the doctor’s family must spend all of their remaining assets down to that level before Medicaid will kick in. Due to these guidelines, I do not recommend doctors with assets of less than $250,000 (excluding the value of home and car) purchase long-term care insurance.

My philosophy about insurance is simple. I recommend that doctors purchase insurance only to guard against those risks for which they cannot afford to self-insure. Accordingly, long-term care insurance is not recommended for doctors who have enough assets to self-insure against this risk.

Admittedly, I am biased against purchasing insurance. As shown above, insurance companies come and go, and even those that remain can institute huge premium increases to unsuspecting policyholders.

Moreover, if escalating premium costs force the doctor to cancel the policy, he or she typically has nothing to show for the thousands of dollars in premiums previously paid.

What will health care look like 20 years from now when it is time for the policy to pay? Will changes in health-care delivery give insurance companies an opportunity to “weasel out” of payment, much like the largest private disability carriers (Provident, Paul Revere, and Union Mutual) attempted before legal action forced a multimillion dollar settlement?

How much is enough?

Due to rising medical costs, general inflation, and increases in longevity, I would continue to self-insure if my nonexempt assets totaled more than $2,500,000 (excluding value of home and car) at age 65, up from my previous recommendation of $2,000,000.

Accordingly, I feel long-term care insurance is most needed by doctors whose net worth is in the $250,000 to $2,500,000 range. Of course, there may be situations where doctors with nonexempt assets in excess of $2,500,000 will wish to take out long-term care insurance.

Doctors with family medical histories that place them at a greater risk for long-term stays (Alzheimer’s, Parkinson’s, etc.) may wish to take out and maintain coverage despite higher asset levels.

Also, those doctors who wish to insure their assets in order to transfer them to their children would also fit into this category.

While I have often said that many more children are ruined by too much money rather than too little, this is a personal choice for the doctor to make.

The above article was reprinted with permission from “The McGill Advisory” newsletter.

John K. McGill, MBA, CPA, JD, is a tax attorney, CPA, and MBA, and the editor of “The McGill Advisory,” a monthly newsletter devoted to tax, financial planning, investment, and practice-management matters exclusively for the dental profession. The newsletter ($209 a year) and consulting information are available from John K. McGill & Company, Lake View Professional Building, 8816 Red Oak Blvd., Ste. 240, Charlotte, NC 28217. Call (704) 424-9780, toll-free (888) 249-7537, or visit the Web site at www.bmhgroup.com.