Insurance: It's complicated

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Question: My husband and I are 56 and have a 15-year-old daughter. I am employed with a good salary and good benefits. My husband is working as a freelance writer/editor/journalist. We're doing OK financially, our only debt is our mortgage, we have decent savings, and we are pretty much on track for retirement savings.

My real question is about disability and long-term care insurance. I have some level of short- and long-term disability through work, but my husband has nothing (besides Social Security), and neither of us has long-term care insurance. I worry about what would happen if we lost one income stream. We've looked into these programs, but they are not cheap (especially the long-term care insurance). Is this something we should have? If we do, it will probably mean less savings in other areas (such as retirement). Is it worth the trade-off? Catherine, Princeton, NJ

Answer: I'm going to answer your question in two parts. I'm a fan of disability insurance. But I'm a skeptic about long-term care insurance.

On disability insurance, you're right to worry about the loss of an income. According to the Life and Health Insurance Foundation for Education, an industry trade group, about one in five Americans will become disabled for one year or more before reaching age 65.  The risk is why disability insurance can be a smart buy.

It's a critical part of your household financial safety net, assuming you can afford it. It's really paycheck protection (or, more accurately, partial paycheck protection), since it replaces only some of the lost income if your husband can't work because of an illness or injury, such as carpal tunnel syndrome.

Disability insurance policies aren't easy to decipher. You'll need to compare how different policies define disability, how long the income replacement will last, what percentage of income will be replaced, and so on. I believe it's worth the effort.

The Insurance Information Institute, another industry trade group, offers some basic information about disability insurance here.  The consumer advocates at Consumer Federation of America have a brochure here.  

I wish I could take as strong a position on long-term care insurance. I can't. I remain a long-term care insurance skeptic. The best advice I've seen is that "it depends."

The case for long-term care insurance is compelling. A year in a nursing home averages around $50,000. It can easily run $30,000 or more a year to live in an assisted-living center with professional care. Home care is costly, too. Yet Medicare and regular health insurance policies don't cover most of these astronomical costs.

Problem is, the case for paying the steep premiums that come with owning actual long-term care insurance policies isn't anywhere near as compelling. LTCI is a complicated product, difficult to research and analyze. It's an expensive product, too. A number of insurance companies have dropped out of the market. Others did poorly by their policyholders.

There are also many demands on your money that I think are more important than LTCI, such as retirement savings, disability insurance, and an emergency fund. In other words, I don't think you should skimp on retirement savings to purchase LTCI.

The argument for buying LTCI gets strong when there is a family medical history that suggests the likelihood of needing the insurance is high.

Howard Gleckman, a former colleague of mine, is a gold mine of good information on LTCI. He recently wrote a smart piece about long-term care insurance: Should You Buy Long-Term Care Insurance? Maybe Not.  He's one of the more knowledgeable people writing about LTCI and here's his conclusion: 

When it comes to long-term care insurance, I am often asked the same question: Should I buy? As these two reports suggest, the right answer is: It depends.  

The article is well worth reading.

So, you shouldn't purchase LTCI without a lot of research.  A good place to become familiar with it is a publication from the Society of Actuaries, Taking the Long-Term Care Journey

A common rule of thumb has been that purchasing this insurance is not worth it for those with low amounts of savings -- for example, less than $250,000. That is because of the very real likelihood that they will need to turn to Medicaid in event of a significant care need.   Rules of thumb can mislead, however. It's necessary first to look at a person's full financial picture -- assets, income, and expenses -- not just assets.

Second, people need to be aware that Medicaid benefits are getting more restricted and will continue to do so. Finally, the availability of partnership programs, mentioned earlier, may provide a means of preserving assets so that the purchase of long-term care insurance may make sense for the less wealthy.

Those with very significant wealth -- for example, over $2 million -- may be comfortable with creating a set-aside account to cover their future care costs. However, even wealthy people may want to purchase long-term care insurance to reduce the uncertainty about the impact that care costs may have on bequest values.

Those with "in-between" levels of wealth will see the clearest benefit from purchasing long-term care insurance.  

Decisions made with regard to long-term care will require a great deal of research and analysis. In the end, however, the physical, emotional and financial well-being of all concerned will be worth the effort spent.

In other words, "it depends." Caveat emptor.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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