long-term care insurance

Morningstar: There have been previous studies about the effectiveness of long-term care insurance, whether it makes sense for people to purchase it, but yours used a slightly different approach. Can you explain what you did that was different?

Anthony Webb: The approach is really sort of a two-step approach. The first step is to actually get the probabilities of going into care right. What we showed is that the previous research has underestimated the probability of needing care but correspondingly overestimated the average length of time that people spend in care. So, the most widely cited piece of previous research says that men and women, age 65, had a lifetime risk of needing nursing-home care of 27% and 44%, respectively. Our new study shows that the risks are, in fact, higher. They are 44% for men and 58% for women. That is the bad news. The good news is that the average duration of stay for those who go into a nursing home is less than previously estimated. [The study pegs this figure at 1.4 years for women and 0.9 years for men, well below the 2 years for women and 1.3 years for men reported in an earlier study.]

Morningstar: So, how do your findings change the standard of advice that is given to people with regard to whether or not long-term care insurance is likely to be worth it for them?

Webb: The practical answer is that a high percentage of people who purchase long-term care insurance lapse their policies prior to the ages at which they are at greatest risk of needing care. And if an individual lapses his policy, the premiums are wasted. So, the first piece of advice I would like to give is that you really shouldn't take out a long-term care insurance policy unless you're very confident that you're able and willing to carry on paying the premiums over the rest of your life. The second comment is that for many individuals of modest means--and I don't mean to sound harsh here--Medicaid may be the least bad option. The reason is that if you're an individual of modest means, the primary beneficiary of your long-term care insurance policy is the government, which benefits in the form of lower Medicaid payments. So, for every dollar that you get in long-term care insurance benefits, the government is saving maybe $0.60, $0.70, or $0.80 in Medicaid benefits.

Morningstar: Some experts say that people don't need long-term care insurance if they have too much or if they have too little, but for people who fall in the middle somewhere, it might make sense.

Webb: Yes, I think that's exactly right, that the very, very rich can self-insure. Those who have very little resources really cannot afford the premiums. It's the people in the middle who have a dilemma.

Morningstar: So, where does that middle fall? Is there a certain income band at which you would say that long-term care insurance would make sense?

Webb: I would be more inclined to express it in terms of assets rather than income and say that the people who have a dilemma are those who maybe have nonhousing assets in the order of $250,000 up to $1 million--and that's a relatively small section of the population.