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Tuesday, March 20, 2012

Long term care insurance: post #3. This isn’t like life insurance.

A major problem with long term care insurance is the amount of trust involved.

1. You need to trust that the insurance company will be financially sound for, say, 40 years.

2. You need to believe that the amount of insurance you are carrying will be sufficient – i.e. you need to know what long term care will cost in, say, 2030.

3. You need to believe that when you want to collect, the insurance company will agree that you need long term care and pay for it to the extent you feel you are entitled to be paid.

4. You need to know what it costs.

Compare and contrast

Let’s compare long term insurance to life insurance and see how different they are.

1. Financial soundness depends on how strong the company is NOW, and how strong they will be in the future.  But it’s not necessarily the whole company that you care about – it’s whatever part actually covers you, which may be a subsidiary. How strong they will be in the future depends on actuarial assumptions.

Life insurance depends on an estimate of how many people will die at what ages.  There is a lot of data on that, so they can predict reasonably well what percent of those who are 60 will die at 70, 71, etc.   

Long term care insurance depends on an estimate of how many people will need long term care, at what ages, and how long they will need it. But there are a log fewer statistics on that, and a lot more uncertainty around the statistics.  So, your insurance company may not be stable.

2. Life insurance pays a fixed amount (e.g. $100,000 when you die).  Long term care insurance has much more variability in the amount you collect, from $0 to a very large amount.

The life insurance company wants me to stay alive as long as possible. The long term care insurance company wants me to die before I collect anything at all, and once I start collecting, wants me to die ASAP.  I find that creepy, but now I am letting emotion creep in.

Because of this variability, you may not have any idea if you are carrying enough long term care insurance. Too much and you are wasting money. Too little and you are going to be short.

3. In terms of collection, life insurance is very simple. The state issues a death certificate, which means you are dead. That’s pretty black-and-white.  No such clear designation applied to long term care insurance. Do you “need” long term care, or could you stay on your own for longer? These are hard enough decisions even without some biased third party becoming involved.  And what if they don’t pay up?  There may be arbitration (and in general the financial industry tends to win these arbitration cases) or court (which is expensive and emotionally draining if you are already so sick you want to go into long term care).

4. In terms of costs: life insurance is pretty predictable. You can look up the costs of term, compare them, compare a set of standardized features (level premium, accidental death, renewable, etc.) and there you are. 

Long term care is not so simple, as we’ll see in our next installment.