Are You a Genius or a Fool to Avoid Long Term Care Insurance?

Buying a long-term care insurance policy can be a valuable investment for those who purchase it well in advance of the time they’ll need it, yet few Americans are taking advantage of this genius option.  But you are not necessarily a fool if you have not made this purchase.

long term care

Is long term care insurance genius or for fools?

While some 70% of Americans will require long-term care services at some point, currently only about 8%  of the U.S. population has LTC insurance, according to a March 2015 report by Daniel Gottlieb and Olivia S. Mitchell, who are insurance and risk management professors at the Wharton School of the University of Pennsylvania.

Long-term care includes a range of health and personal care services, including provision of medication, as well as assistance with activities of daily living, which include dressing, eating, toileting and bathing.

Such care may be received in a skilled nursing facility for more acute ongoing needs, or even community-based settings like assisted living facilities. But the care for such services can be costly.

In the U.S., the median monthly rate for assisted living care is $3,600, according to the 2015 Cost of Care Survey from Genworth, a provider of long-term care insurance. For nursing home care, the national median daily rate to receive care in a semi-private room is $220, while for a private room it is $250.

And both of these services have been on the rise over the years, with assisted living rising at a five-year annual growth of 2.48% and nursing care rising 3.95% for a private room and 3.53% for a semi-private room.

Depending on the policy you choose, long-term care insurance may also cover home care and adult day care services. The cost of long-term care insurance also varies depending on the services covered by the policy you choose to buy.

So why aren’t people buying long term care insurance when it could be a great resource for so many people? Here are 3 reasons:

1. Cost Pressures

Policies cost less if purchased at a younger age versus if they were bought when you’re older. If you are older and have a serious health condition, you may not even be able to get coverage. And if you do, you may have to spend considerably more, says AARP.

For a single 55-year-old, the average cost for a long-term care insurance policy could cost $2,007 per year, according to rates from the American Association for Long-Term Care Insurance (AALTCI). This assumes an initial policy benefit of $164,00 based on a daily benefit of $150 and three-year benefit period.

For couples, the costs could be even higher. For example, a couple both aged 55 may find their average cost for this same policy running anywhere from $2,080 at the low end to up to $4,824 at the high range, according to AALTCI figures.

It’s important to note that as the price of care increases over time, your long-term care benefit will start to erode unless you select inflation protection in your policy, advises AARP.

“To determine how useful a policy will be to you, compare the amount of your policy’s daily benefits with the average costs of care in your area and remember that you’ll have to pay the difference,” AARP writes in a post on “Understanding Long-Term Care Insurance.”

Given the riskiness of LTC costs and the potential benefits of having long-term care insurance, still there are few Americans who actually purchase such coverage, write Gottlieb and Mitchell in their report titled “Narrow Framing and Long-Term Care Insurance.”

And it’s this concept of “narrow framing” that might explain why people aren’t buying into long-term care insurance.

2. “Narrow Framing”

Gottlieb and Mitchell describe “narrow framing” as people’s tendency to make decisions in isolation, specifically citing psychologists who have noted that many people fail to account for other risks they also face, particularly when making complex decisions.

“Such an approach often simplifies decision-making under uncertainty, but it can also be quite costly,” write Gottlieb and Mitchell.

When it comes to finances, this phenomenon suggests that people are more likely to accept investments when returns are aggregated together in a portfolio, versus when they are shown each asset’s returns separately, argue the researchers.

3. People Have Different Attitudes Towards Gains than Losses

“Likewise, people take less risk when they are shown returns more, versus less frequently,” write Gottlieb and Mitchell. “Narrow framing may be especially problematic for those making decisions about insurance. The purpose of insurance is to alleviate the impact of losses, so failure to evaluate the potential benefits of avoiding the losses alongside the costs of insurance can make buying an insurance product seem undesirable.”

In a BBC article, Harold Evensky, who leads financial planning for the firm Evensky & Katz, explains the different ways people think about gains and losses like this: “[Behavioural finance shows that] if you give someone a choice of, say, a 100% chance that they will get $800,000 or an 80% chance that they will get $1,000,000 and a 20% chance they get nothing, they take the sure thing.

“Turn that around, a 100% chance of losing $800,000 or an 80% chance that they lose $1,000,000 and a 20% chance of losing nothing, they gamble.  It’s exactly the same question, but it helps client’s understand the difference between being risk averse and loss averse.”

Is Long Term Care Insurance  Right for You?

The decision to get long term care insurance is a big one.  It may require the advice and guidance of a certified retirement planner.  You may also want to look at other ways to cover your long term care costs.   Here are 5 Creative Ways to Plan for and Fund Long Term Care.

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