Our Blog DO JOIN THE CONVERSATION

I have heard some financial advisors suggest clients find a high deductable long term care insurance program. Here’s the concept: You save premium dollars by buying a high deductable catastrophic policy to cover the risk of needing extended care for a long period of time. Just like property casualty coverage, the thought is to cap the client’s out-of-pocket losses. When I sit with the advisor and his client we then spend our time discussing the merits of 30, 90, 180 or even 360 days elimination period. This is how a deductable is measured in “long term care insurance” speak. Having a high deductable is a reasonable plan for certain types of financial risk, but in my opinion this strategy does not work for long term care insurance for a number of key reasons.

First, and foremost, deductibles in long term care services are figured in days of service, not dollars. Planning for long term care services often has a 15 to 20 year time line. What sounds like a reasonable deductible in today’s dollars will in fact look totally different in 20 years. Why? Because of the cost of care continues to rise at or about 5% each and every year. Ninety days of long term care services could cost $10,000 or more in today’s dollars. Twenty years from now that deductible could cost $25,000 or more. Will there be ready cash at that time to cover the cost? What additional costs will be added to raise that cash, such as capital gains tax, cost of liquidating tangible assets or taxes to draw down IRA funds? The cost of raising cash could raise the cost of care substantially. On the other hand insurance proceeds are tax free. Family members may ask, “If Mom had this kind of coverage, why is it still costing so much before it kicks in?”

The other key difference is that in the high deductable scenario the policy owner assumes responsibility for paying the deductible. With long term care insurance, the policy owner may be in no cognitive or physical condition to assume that responsibility. The family is most often the default provider who is called to fill in the gap with time, money and coordination of services. This would negate one of the critical reasons people choose to buy long term care services with insurance: to spare their family from such responsibilities. In this situation the traditional approach that financial advisors may be tempted to take will put the burden on unsuspecting family members. When it comes to the provision of long term care, the human costs of providing care is left out of the calculations. What we in the LTCi industry know all too well is that long term care is a family affair. Ask anyone who has been through it.

If you have suggested a high deductable for long term care insurance, give us your rationale. There may be something to learn for all of us. How did you set up the program for care? I promise no cheap shots, just an opportunity to discuss.