Long-Term Care Insurance: An Inefficient Market

As a whole, the United States is known to be a risk-averse country. We can buy protection to cover everything we think about including the baseline  medical, specialized coverage, car accidents, or for stubbing a toe when on travel in the Bahamas. If your trip to Grand Cayman is interrupted by a hurricane, you’re still covered. If Spot needs some care? No worries because pet insurance has you covered.

Expenses for Long-Term Care are not comparable to the cost of a cruise. According to MetLife, a private room nursing home costs on average $87,000 per year. People needing less care can get by at an assisted living facility for $42,000 per year, usually not including the cost of the care you need. These are annual expenses and you should expect them to continue increasing about 4-6% every year.

With all this, why do 40% of travelers buy travel insurance but only 12% of people 65+ buy Long-Term Care Insurance? One argument is that the elderly don’t want the expense of insuring for something they perceive as a low probability. But according to the National Bureau of Economic Research it’s not a low probability. Women 65+ have a 44% chance of entering a nursing home while only 17% of those who bought travel-insurance will need it.

So what’s pushing so many people to avoid this insurance type? There’s been a lot of research on the matter from MIT, University of Illinois, and the National Bureau of Economic Research, and the answer is not simple. One hypothesis is that the cost of insurance is high as compared to the insured benefits. Turns out that this is typically true for men but women’s policies actually pay out more than the premiums. That is, the insurance companies lose money on the women but make up for it with the men. Since women requiring more third-party LTC than men this cannot be the driving factor in the low number of insurance policies. (Interestingly, women have a higher need for LTC  because (1) women live longer and (2) husbands die younger and thus cannot care for their wives.)

The common belief is that the culprit throwing off private insurance is actually the public insurance program called Medicaid.  Medicaid is typically for people with very low income and resources and it does cover LTC expenditures. The issue is that Medicare is a payer of last resort; if you have private insurance then that pays first. Medicaid will only pay once you’ve exhausted your assets and no-longer have the ability to pay.

The National Bureau of Economic Research writes:

Medicaid is thus an incomplete but free substitute for private long-term care insurance and its existence may discourage individuals from purchasing private insurance.

Consider Maggie, an elderly woman requiring LTC. She has enough savings to cover one year of care. After that her funds are gone and Medicaid kicks in. LTCI, if she had any, would have delayed her need for Medicaid but since Medicaid is free, what’s the benefit of that?

If you do have assets and don’t want them drained by LTC, then LTCI can help — but be sure to get professional advice to make sure you’re not paying for what you might get from Medicaid for free.