Q&A: "What Are the Pros and Cons of Purchasing a Long Term Care Policy?"

Question and background: 

What are the pros and cons of purchasing a long term care policy. I've been researching them on-and-off again for a few years and I can't make heads or tails of what they cover and if it even makes sense to buy a policy.

Answer: 

You're wrestling with one of the toughest financial questions that folks have to deal with. Analyzing it is complex and there can be a lot of variation in policy particulars depending on the insurance company. So don't feel that you're alone in the confusion.

The "pros" of long term care insurance (LTCI) are that it might save you from spending your assets down to nothing if you need long term care. The "cons" are that it can be very expensive and, if you buy traditional LTCI, all those premiums will be down the tube if you never need the coverage. 

Most long term care policies pay-out only when you're unable to perform at least 2 of the 6 activities of daily living (ADLs), or you have cognitive impairment. The 6 ADLs are: eating, bathing, dressing, toileting, transferring (walking), and continence. Cognitive impairment would involve forms of dementia or Alzheimers. A doctor must certify your disability.

In the early days of long term care insurance (LTCI), you typically had coverage only if you ended up in a nursing home. Most policies today will pay for eligible coverage regardless of whether it's in your home, assisted living, or the nursing home. 

The amount you receive depends on the benefit levels of the policy you buy. There's typically a daily maximum, with a total pool benefit. When buying the policy, you'll also decide how long of an elimination period (60 days, 90 days, etc) where you have to pay for your own care first before policy payment kicks-in. Think of it as kind of like the "deductible" on your auto insurance.

I hate rules of thumb because everybody's situation is different. But one approach indicates that buying LTCI probably doesn't make financial sense if your assets are less than $250,000 and you probably don't need it (can self-insure) if they're in excess of $2 million. Don't religiously follow that, but it gives a general idea of who should consider LTCI. 

While traditional LTCI has its place, conceptually, I'm more in favor of the "hybrid" policies. These are where the long term care coverage is built onto the chassis of a permanent life insurance policy or an annuity. They are typically not funded with regular premium payments (as with traditional LTCI), but rather with a large, single premium. The benefit? With the hybrid policies, someone besides the insurance company is going to benefit--either you if you need long term care, or your beneficiary if you die without needing it. Unlike traditional LTCI, the hybrids are not a "use or lose it" arrangement.

Here's a short blog post I wrote back in August 2010 about hybrid policies:

Have Your Cake and Eat it Too, Sort Of 

Hopefully, this gives you a reasonable overview and clears some of the confusion. Given the product's complexity, you should discuss your particular situation with a an LTCI expert.