Long-Term Care Insurance Is a Poor Buy, CFP Says

Don’t buy long-term care insurance (LTCI).

Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance. LTCI can increase rather than reduce risk in retirement.

Long-term care insurance is an investment that doesn’t make sense. It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust.

Mathematics works against LTCI because most people will need long-term care eventually. For insurance to make economic sense, the risk must be spread across a pool of participants. With other types of insurance, only a portion of the population collects, while the others continue to pay their premiums, covering expenses paid out and keeping premiums manageable.

Since the bulk of buyers will eventually collect, LTCI insurers will have to raise premiums. This, in turn, will cause the healthier portion of the population to opt out, leaving a pool of less-healthy participants who all believe they will need to collect on this insurance sooner than later.

Instead of paying into a policy with rising premiums that may empty your retirement savings, it is better to plan for long-term care by saving and investing.

The conundrum of long-term care is that people with few assets can afford it best. They’ll burn through their assets quickly and then Medicaid will pay for their care. If one spouse needs care and the other doesn’t, Medicaid rules provide for a reasonable level of assets and income for the healthy spouse.

On the other hand, wealthy people don’t need the product because they have the money to pay for care.

It’s the bulk of people in the middle who are most vulnerable to long-term care costs. And for them, there are no magic solutions.

The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds.

A Certified Financial Planner can run various scenarios and stress tests to show if you’re ready for retirement and can afford long-term care eventually. I regularly run such cash-flow projections for my clients.

What about giving your assets to your adult children so you’ll be eligible for Medicaid? It can work for some people, but there are a lot of drawbacks to that strategy.

One big problem is that there’s a look-back period of five years on assets you gave away. If you apply for Medicaid within 60 months of transferring your assets, you’ll pay a prorated penalty based on the average monthly cost of care in your area.

Because of that disadvantage and the fact that you lose control of the assets you give up, I don't usually recommend giving away your money.

But if you do decide to, set up an irrevocable trust. Without a trust, your former assets could be lost if your child is hit with a costly divorce settlement, or has big debts he or she can’t pay, or sued.

A lifetime of savings could be lost quickly.

Have a lawyer who specializes in elder law and estate planning draw up the trust so it won’t jeopardize Medicaid eligibility. Find a reputable lawyer, not one who’s engaged in fearmongering.

If your goal is to leave money to your heirs, consider buying a life insurance policy. Term life policies are inexpensive for middle-aged buyers, but they’re costly for people above 65, who are usually better off with a whole life policy.

Life insurance is a good way to leave assets to survivors. It’s more predictable and has more reasonable costs than LTCI.

In addition, you can set up an irrevocable life insurance trust (ILIT) to purchase a life insurance policy. As the beneficiary of the policy, the trust can protect the proceeds.

Melinda Kibler, Certified Financial Planner (CFP), Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group’s Fort Lauderdale, Florida, office.

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