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The Conundrum of Long-Term Care Insurance

Trusts & Estates Law Alert John T. Bannen

More so than estate taxes, long-term care expenses have become the major obstacle to passing one’s assets to one’s heirs — it is care that one does not want, at a price one often cannot afford to pay. In this sense, we do not fear death as much as old age. Nevertheless, the reality of longevity combined with diminished capacity is not a problem that goes away by ignoring it.

Confronted with the possibility (but thankfully not the certainty) of ruinously expensive long-term care, people have three choices: (1) rely on the government to provide (although to go through this door you can have few, if any, assets); (2) self-insure (that is, plan to pay for whatever comes down the road with your own funds, and hope for the best); or (3) buy some insurance to pay for the care needed either at home or in a skilled care facility.

Let the Government Provide

While current law allows a potential aid recipient to give away all of his or her assets to become eligible for government-paid long-term care (Title XIX, or Medicaid, as it is sometimes called), this is not a palatable option for many people. Besides the obvious loss of control over one’s assets, Medicaid patients contribute less to the operation of a skilled-care facility than private-pay patients, and available resources may have an effect on what a facility can offer. A skilled-care facility with a large number of Title XIX residents is not likely to be the Ritz Carlton of retirement homes. Moreover, to be rudderless on a sea of government benefits, blown about by the winds of deficit welfare spending, is not an enviable position.


Self-insuring…this is an attractive option particularly if one never has significant long-term care expenses. You save by not having to pay all those expensive long-term care premiums. Yet self-insuring is more painful if you have to start paying monthly checks in five figures for long-term care expenses. While there is considerable debate on how much money one should have before one can safely self-insure, most agree that it is more than several million dollars. It is worth noting that even if the person can afford to self-insure, that does not necessarily mean they should. The cost of shifting all or part of one’s long-term care risk to an insurance company can be significantly less than paying the actual long-term care expenses in the event of a lengthy stay. Still, if one can afford to self-insure, one’s estate—even after paying the long-term care expenses—may still be large enough that the diminution of the estate is not significant. One may not care too much if the children get $3 million after long-term care expenses instead the $5 million they would have gotten if there had been no long-term care expenses.

Long-Term Care Insurance

The problem with long-term care insurance, of course, is the cost. If the premiums were lower, more people would chose the insured option. Unfortunately, the premiums reflect the probability of the occurrence (the number of people who will actually need long-term care) and the magnitude of loss (what the care will cost). An expensive event that happens fairly often will logically require a larger premium. The current low-rate interest environment that has decreased the yield of bonds, which insurance companies use to build reserves with which to pay claims, has also not helped matters.

The Answer May Be a Compromise

So what to do? The answer for many could be a compromise: a little bit of this, a little bit of that. If the cost of fully insuring long-term care expenses is prohibitive (and it can be for many individuals, especially at older ages), consider purchasing some long-term care insurance and self-insuring the rest, or consider buying a policy that would put a serious dent in the current cost of care but not buying an inflation rider that could substantially increase the cost of the premium. Alternatively, consider a tax-free exchange of some of your existing life insurance (assuming it has cash value and no longer serves a death benefit need) to a combination policy that provides not only a life insurance death benefit but also a long-term care benefit during your lifetime. While it would have been better to have full coverage in the event of a long-term care need, if you never need the care, the economic hit for paying premiums will be less. No matter what happens, you will never be “all wrong” in what you did, but on the other hand you will never be 100% right either. Without a crystal ball, it is hard to be 100% right, so buying some insurance, especially if you can afford it, could be a reasonable hedge against a significant long-term care loss.

Search For an Informed Decision

Regardless of what you decide, considering your options in order to make an informed decision is a good idea. Purchasing insurance or self-insuring is a decision upon which intelligent, well-informed people will disagree. The decision may also depend on how you feel about insurance in general—there is not a right or wrong answer, per se. While clairvoyance would make the decision easy, prescience is a gift denied to most of us. If you decide to buy insurance, then it is less painful to do so at a younger age; 50 is better than 60, but 60 is better than 70.

Please note that the point of this update is not to convince anyone that they should or should not purchase long-term care insurance but rather to suggest a thoughtful analysis of the options; only after that occurs can people make the “right” decisions for their particular sets of circumstances.

For more information on long-term care options, contact John T. Bannen at (414) 277-5859 /, or your Quarles & Brady attorney.