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Long-Term Care Insurance vs. Other Strategies: Pros and Cons

This post continues my ongoing series on the threat of potentially ruinous expenses for long-term care, which started with Should You Buy Long-Term Care Insurance? Last week's post provided a list of strategies for addressing this threat.

Here I'll analyze the pros and cons of the most feasible strategies on this list, which are:

  • Buy long-term care insurance.
  • Set up a dedicated investment account that will only be tapped for long-term care expenses.
  • Hold your home equity in reserve; if and when you need long-term care, tap it through a home equity loan, reverse mortgage, or by selling the house.
  • Don't draw on principal from your retirement savings to pay for ordinary living expenses; use just interest and dividends. Hold the principal in reserve for the day when you might need long-term care.

The list of "pros" for buying long-term care insurance is short but powerful: Long-term care expenses can wipe out your retirement savings. Insurance, properly purchased, can prevent this from happening, and you can significantly reduce the burden on family and friends.

The list of "cons" for buying long-term care insurance is longer:

  • Premiums for individually purchased plans are expensive. Annual premiums can range from $1,000 to $3,000 or more per person if you start in your fifties, depending on the policy's features. For this reason, most Americans don't buy long-term care insurance.
  • Some people buy LTC policies while they're working and can afford the premiums, but they let the policies lapse when they retire and can no longer afford the premiums. This has the potential of wasting most or all of the money spent on premiums.
  • The fine print on these policies can deny you benefits you thought were due. For instance, not all policies cover all health conditions or all types of long-term care services and facilities. Also, some policies have strict eligibility conditions for paying benefits; if you don't meet these conditions, you might be incurring long-term care expenses but won't receive any benefits from your policy.
  • Finally, if you never need long-term care, you've spent a lot of money on premiums for nothing. But this isn't really a valid reason for avoiding insurance, since you've enjoyed the peace of mind that comes with insurance protection.

The list of "pros" for choosing alternatives to long-term care insurance is very short: If you don't incur substantial long-term care expenses, then you didn't waste all that money you would have spent on insurance premiums.

The list of "cons" for choosing alternatives to long-term care insurance is also very short but significant: There's a good chance you'll come up short. Most middle class Americans won't have sufficient savings or home equity for a long stay at the most expensive facilities, if these are needed. My second post on long-term care -- Long-Term Care: What Are the Real Risks -- estimated that five percent of people turning age 65 might incur $250,000 or more over their lifetime for long-term care expenses.

If you don't buy long-term care insurance, then you should carefully analyze whether you have sufficient home equity combined with savings dedicated to covering long-term care expenses. In my post on the real risks of long-term care, I noted that it's been estimated that eight percent of the population might spend five years or more at an assisted living facility or nursing home. My third post -- Long-Term Care Services: Why It Pays to Shop -- showed that the average cost for an assisted living facility is $3,185 per month -- which translates to $38,220 per year. The average nursing home costs $185 per day, or $67,525 per year. Multiply these amounts by five years, and you get roughly $200,000 to $350,000 -- for just one person. Double them if you're married.

If you can build a dedicated long-term care investment account and combine that with home equity to approach these amounts, then it might work for you to decline buying long-term care insurance. But this won't happen for many middle and upper-middle class Americans, so people in these categories should consider buying some form of long-term care insurance.

Long-term care insurance is probably the most complex type of insurance that you'll buy, and there's a wide variety of costs and benefits. Next week's post will cover tips for buying long-term care insurance. I'll also describe a hybrid strategy that finds a middle ground between the various strategies, by combining "catastrophic" long-term care insurance with one or more of the alternatives.

Addressing the threat of long-term care expenses is one of the biggest challenges we face in retirement. But for those of us who've already addressed this challenge with our parents, we're well aware of its importance. It's definitely worth the time and effort!

Image from iStockphoto contributor trigga

More on CBS MoneyWatch

Should You Buy Long-Term Care Insurance?

Long-Term Care: What Are the Real Risks?

Long-Term Care Services: Why It Pays to Shop

Strategies for Addressing the Long-Term Care Threat

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