How Do We Fix Private LTCi?

[VolAgent]

Here is an article I read this morning. It is by one of my least favorite financial publications, plus it is written by one of my least favorite financial journalists...

If you look at the bottom of the article it gives by far the worst LTCI advice I have ever read!!

Why Don't Retirees Buy Annuities? They Get Something Most Economists Don't - Forbes


Not only does it cite rate increases as a reason not to buy. But it suggests an annuity that is set to start paying at age 80 in place of LTCI

And he is also wrong about how annuities work. If you die before annuitization the death benefit would be paid, presumably equal to the account value.

 

[Tahoe Ray]

And he is also wrong about how annuities work. If you die before annuitization the death benefit would be paid, presumably equal to the account value.

I think that he's talking about deferred income annuities (a deferred SPIA) where that could be true. However, adding a rider eliminates that issue and at that age, it would probably cost less than 1% of your expected income to do so.

 

[VolAgent]

I think that he's talking about deferred income annuities (a deferred SPIA) where that could be true. However, adding a rider eliminates that issue and at that age, it would probably cost less than 1% of your expected income to do so.

I can't recall ever seeing one, but I'll take your word it exists. Why would you sell it though when there are plenty that don't behave that way.

 

[yankee466]

With low interest rates these days, a SPIA is generally a poor choice. A fixed or equity income annuity with an income rider (GLWB) allows you to choose the time frame that you want to convert to a lifetime income, if ever, without ever annuitizing the account value. This can be a excellent choice if someone is planning to significantly outlive the actuarial tables. Many of these plans come with "income doublers" that will pay you twice the guaranteed income for up to 5 years if you ever need HHC or NH care (fine print of course) Some of these plans ask NO medical questions to qualify. These products are purchased for income, and not primary for account growth.

These are the products that are being sold like hot cakes these days.....often to people who do not understand them.


Else, no one should buy a SPIA IMHO without some built in guarantees of payout.

 

[scagnt83]

What is so sad about the situation is that most people quoted by the financial press about annuities, have a fundamental lack of understanding about annuities.

Almost every single objection the financial press puts out there about why annuities are bad, can be solved by choosing the right product that fits that situations needs.

 

[Tahoe Ray]

I can't recall ever seeing one, but I'll take your word it exists. Why would you sell it though when there are plenty that don't behave that way.

There are few of those types of products to begin with...not to mention that I'll wager you're right in the sense that he still doesn't know what he's talking about.....

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With low interest rates these days, a SPIA is generally a poor choice. A fixed or equity income annuity with an income rider (GLWB) allows you to choose the time frame that you want to convert to a lifetime income, if ever, without ever annuitizing the account value. This can be a excellent choice if someone is planning to significantly outlive the actuarial tables. Many of these plans come with "income doublers" that will pay you twice the guaranteed income for up to 5 years if you ever need HHC or NH care (fine print of course) Some of these plans ask NO medical questions to qualify. These products are purchased for income, and not primary for account growth.

These are the products that are being sold like hot cakes these days.....often to people who do not understand them.


Else, no one should buy a SPIA IMHO without some built in guarantees of payout.

Unless you're using it to buy life insurance...

 

[csalter]

previously posted by csalter



The people who you're describing are not candidates for LTCi. Premiums must be affordable now and in the future.

The concept of your statement about putting money aside each year instead of paying premiums doesn't make sense. Let's say a person decides not to buy a policy and instead puts away $4,000 every year. What happens if 2 years later this person has a stroke or other LTC event where he/she requires care for an extended period? Tell me what $8,000 is going to do? In NY, $8,000 will pay for 3 weeks in a nursing home.
















The people I am referring to that can't afford the payments initially and have to drop them are initially candidates for LTCi. However, when you're income is fixed and you are gettting asked for 100% increases after they've raised your premiums already then that is a bit much. Now I know that CALPERS is not an insurance company, but that happened to their policyholders. It has also happened to insurance companies too. John Hancock has had crazy increases.

Those who are affluent to self insure could buy the insurance but feel they are wasting money if they don't need it and don't like the increasing premiums. If you go to the boglehead forum, there are many there that do not believe in LTCi. They feel it's a waste and consistently steer people away from it. They say it's better to save in an HSA account or other savings vehicle. Those who are proponentes of LTCi point out, like you did, what happens if you don't have time to build up enought money or how much can you reasonably save to be able to put a dent in the potential cost of care.

The product is for the upper middle class who have assets worth protecting. I have a spouse who I don't want to impoverish or force to continuously care for me alone so that is why I got it. I can handle the cost for the 10 years I will pay, but the average person does not wish to have these expenses.

 

[billberry12]

"but the average person does not wish to have these expenses."

And there is the problem. And it is a problem. LTCI is expensive, and the premiums can go up. I do not wish to pay high prices for gasoline, but I do anyway because I need it. If gas goes up, I can decide if I want to pay the higher price or not.

It's basically about making a new decision based on new information.

People seem to have it locked in their brain that they buy LTCI for something that might happen 20-30 years down the road. They forget that by paying that premium TODAY, you are insured TODAY for the risk. If you do drop it later, you HAD coverage for those years you were willing to pay the premium. Just like homeowners and major medical insurance. They go up, and if you ever drop them because the premium went up too much, they certainly do not give you your money back. You paid to be covered while you had the policy. Same with LTCI. It is not a savings account, it is insurance.

Bottom line is.....people either buy it (for their own reasons), or they don't.

If someone doesn't see it as a valuable product to own, or as you say "do not wish to have these expenses" that is their prerogative.

Some folks would rather not have the expenses of paying for their own care with their own money one day. Those are the people that buy long term care insurance.

The folks that don't buy it need to understand and remember that if they don't buy it, then they will have to spend all their own money before the government might pay for a nursing home for them.

Every decision has it's own set of consequences

To buy or not to buy, that is the question. Everyone has a different answer based on their own situation and belief system.

 

[scagnt83]

People who "self insure" are usually fooling themselves and think that they will never need LTC.

LongTermCare.gov states that 70% of people turning 65 can expect to use some form of LTC in their lifetime.
So the majority WILL need it to some extent.

But insurance is about leveraging your money. And imo it is best to leverage your money for the large risks, not the small risks.
Example:
It is easy & practical to self insure your car and just have liability coverage. Just save up a decent replace/repair amount over the course of a year or two and your good.

It is not easy or practical to self insure a home. Since you would need a very large amount saved. It would take the average person many many years to self insure a house.


So lets look at LTC and its financial risk.
National average for a private room in a nursing home is $80k
National average for community based care is $40k
Length of stay averages 3 years.

So you will need $120k-$240k to pay for LTC.
Basically what a small house costs.

How many people with $240k homes do you think have homeowners insurance? Probably over 90%.

But they only have a 1 in 10 chance of loosing that house to a fire.

They have a 7 in 10 chance of needing that $240k for LTC.

So if you are going to be forced to come up with that $240k, does it not make sense to only pay a fraction of that cost via LTCI?

Would you rather pay $240k over 3 years or $50k over 10-15 years? Which is the better deal???

 

[Justin Bilyj]

Tyler that was a great way to frame LTCi!!!