DECA Review

When I received solicitations to enroll in a long-term care (LTC) insurance program several years ago, I wondered if I might be better off in the end putting my money into a Roth-IRA instead of paying monthly LTC insurance premiums. I discussed this dilemma and lack of publicly available research or decision support on the topic with then-MBA student Bryan Furman (MBA ’14), and we decided to run some analyses on the complexities of the choices at hand. Using publicly available data from sources such as the Society of Actuaries and Genworth Financial (a company that  offers LTC insurance in Virginia), we built a model that accounted for the LTC insurance products available (including both group and costlier individual options), the uniqueness of various individual situations and their impact on the likelihood of required care, the cost of LTC insurance (premiums), and the additional cost of LTC expenses with and without various levels of insurance coverage.

Some degree of planning for eventual long-term care is certainly something we should all be doing; Americans today are living longer than ever before, 70% of those 65 and older are expected to require long-term care at some point in their lives. An individual’s specific level and duration of required LTC is difficult to predict, while associated costs are anything but cheap, creating the potential for significant financial impacts on individuals and their families. The purchase of long-term care insurance is a difficult lifetime choice made in the face of highly uncertain risks, including mortality, morbidity, timing and length of LTC, and portfolio investment risk and a long time horizon. Many individuals do not know how to make the decision and so avoid it; a perfect situation in which to apply some decision analysis.

The Monte Carlo model we created used decision variables for the type and amount of LTC coverage that any individual should purchase according to his or her unique situation. An individual’s LTC expenses would come first from insurance coverage and then from retirement savings. We studied whether an LTC insurance plan is the best approach, and how much is the right coverage. Furthermore, if such insurance is the best bet for some, is the insurance good for everyone—regardless of gender, enrollment age, risk tolerance, and financial background—or just a few, and how much insurance should a specific individual choose? This may be the first study that takes such a decision analytic approach to this lifetime personal choice.

The study suggests that the optimal choice in most situations examined would be to purchase no LTC insurance. However, it does indicate that there are situations wherein LTC purchase would be the optimal choice: combinations of low risk tolerance, low levels of retirement savings, high expectations of an LTC cost increase, and younger individuals. The key findings were as follows:

  • A base case analysis for 65-year-old individuals starting with a fixed initial retirement amount of $150,000 in Virginia, revealed that, except for a woman enrolled in an individual (not a group) plan, the individuals are better off tossing their LTC insurance solicitations, and, instead, exhibiting the discipline to put that money directly into their retirement accounts. And a woman enrolled in an individual plan should take the least coverage level available. That is, the average expected final holdings at death simulated in 2 million trials were highest in the absence of an insurance plan for men in an individual or group plan and for women in a group plan.
  • The subsequent one-at-a-time sensitivity analysis allowed us to apply a number of key variables to the study, including age, initial retirement amount, risk tolerance, investment rate of return, and projected LTC cost increases. The biggest sensitivity effect comes from risk tolerance and age.  If anyone should buy LTC insurance, it would be those with low risk tolerance and those who can buy insurance relatively early (45–55 years of age).  It is likely too late for individuals aged 65 or older to acquire LTC insurance; they are better served putting money into their IRAs.

 

What is a big driver for the lack of value in LTC insurance? The possible return on investment in these insurance plans is limited by most plans’ coverage cap of three to five years. In extreme health situations such as Alzheimer’s or immobility, for instance, that limited timeframe of covered care is simply too short, especially for women who tend to live longer and have higher needs for LTC.

As a result of these plan limitations, we urge insurance companies to rethink their LTC product offerings going forward. Insurance is, after all, meant to cover those truly catastrophic, costly events that plague only a few individuals, but the current coverage caps in available plans fail to address such catastrophes. Insurance companies might consider policy innovation such as some combination of life and LTC insurance plans.

While there may be situations where LTC insurance is the optimal choice (younger individuals with low risk tolerance and low retirement savings), the optimal choice in most situations is to have the discipline to put away money in retirement investments in lieu of LTC insurance premiums.

 

Reference

Bodily SE, Furman B (2016) Long-term Care Insurance Decisions. Decision Analysis. 13(3):173–191.

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