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Few Need Long-Term Care Insurance

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Years of confinement to a nursing home is everyone’s worst fear for old age.

With a semi-private room now costing about $81,000 annually, the prospect of a lengthy stay is also a popular reason for buying a long-term care insurance policy to cover it.

Undercutting this rationale is a new study led by senior economist Anthony Webb of the Center for Retirement Research, which sponsors this blog. He finds that U.S. nursing home stays are relatively short: 11 months for the typical man and 17 months for a woman.  There’s some unpleasant news in the study, too, because the risk that an older person may one day need nursing home care is 44 percent for men and 58 percent for women.

The significance is that nursing home stays are higher-probability, lower-cost events than previously thought, which reduces the appeal of purchasing long-term care insurance.  This finding helps to explain why so few older Americans – 13 percent – buy the coverage to protect their financial assets from potentially being drained by nursing home bills.

The biggest reason for the lack of interest in insurance had already been well-documented in the research: Medicaid pays for a long-term stay in a nursing home for those who can’t afford one.  The upshot for individuals weighing whether to buy the private insurance is that the benefits of doing so often accrue not to the individual who bought the policy but to the government, in the form of reduced Medicaid payments.

But the new study added an assumption absent from previous attempts to estimate how many people might benefit from having insurance: Medicare also sometimes pays for shorter nursing home stays, accounting for about 15 percent of total long-term care spending.

Taking all of this into account, just 31 percent of women and 19 percent of men benefit from buying long-term care insurance – far fewer people than previous studies had estimated.

The Center’s new, lower estimates of Americans’ willingness to pay for the insurance combine the best methods used in a pioneering 1996 study and a 2014 study.  The Center used monthly – rather than annual – probabilities of transitioning between various levels of care, from healthy and requiring home health care to residence in an assisted living facility, a nursing home, and death. These probabilities were applied to an economic model estimating a single person’s willingness to pay for long-term care insurance.  The Center also used fresh data on the actual lifetime patterns of care use revealed in a nationally representative survey of older Americans.

Everyone’s circumstance is different, but this research strengthens the take-away from prior studies: buying long-term care insurance does not make financial sense for many people.

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