Maybe You Don't Need Long-Term Care Insurance After All

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Photograph: Getty Images

The biggest threat to a retiree's nest egg isn't a stock market crash. It's a long illness requiring round-the-clock care.

The statistics behind that scenario -- $81,000 a year for a nursing home, $184,000 for 24-hour home care -- are what sells long-term care insurance policies. But while past research suggested that many more people needed the coverage than bought it, a new study suggests that most people should just skip it.

The study, by Boston College's Center for Retirement Research, focused on singles, who now make up the majority of Americans. Long-term care insurance makes financial sense only for the richest 20 to 30 percent of unmarried people, it finds. For the rest, it makes more sense to go without. If they need care, spending down their assets and then letting Medicaid pick up the tab is the most practical solution.

What's new about the Center's research is its more accurate estimate of the length of nursing home stays. The study, by using monthly data instead of annual numbers, finds that people who go into nursing homes stay there for 30 percent less time than previously estimated. The average nursing home stay for a man was less than a year; for women, 17 months. And 45 percent of patients don't stay more than three months.

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Many of those short nursing homes stays end in death. Those visits are often covered by Medicare, which can cover up to 100 days in a nursing home. If Americans are spending less time in nursing homes, they face a lower-than-expected chance of the most dire scenario: an expensive, long illness that will bankrupt them. So there's less need to pay extra for long-term care insurance, and more logic for just relying on Medicaid as a safety net.

The Center found that long-term care insurance is optimal for only the wealthiest 19 percent of single men and 31 percent of women. That's down from 33 percent of single men and 41 percent of single women in previous estimates. These new, lower estimates don’t take account of other reasons people might be wary of long-term care insurance, the center’s Anthony Webb says. In recent years, companies have sharply raised premiums for existing policyholders, for example.

This “irrelevant” academic study doesn’t factor in many of long-term care insurance’s perks, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. Most customers see long-term insurance as “nursing home avoidance insurance,” Slome says. “They want to remain in their own home,” and private insurance gives them more options for home health care than Medicaid. Long-term care insurance was never meant to be universal, he says. And, by raising premiums and making health screening stricter, insurance companies have made it even more selective.

Long-term insurance can pay off for wealthier singles, even under the Center’s new math. It takes $260,405 in assets, or about $90,000 in annual income, to put a household in the top 25 percent, the Russell Sage Foundation and the Congressional Research Service estimate. These affluent customers can afford the premiums, and insurance can protect their heirs' inheritance if that's a goal. The same logic works for couples, but only if they're even wealthier. Webb warns that forthcoming research will show long-term care insurance makes even less sense for married couples than it does for singles.

More stories by Ben Steverman:

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