My Dream Long-Term Care Insurance

Motivation: The problem with long-term care insurance

Due to these high probabilities, LTCI has grown very expensive, and (as also noted by Kitces) it now feels more like prepayment of expenses than true insurance. Putting it differently, most retirees either can’t afford long-term care insurance or can afford to skip it.

Another issue is that LTCI policies are designed more like dental insurance than medical insurance: They cover expenses to a point, but then you’re on your own. Granted, the max payout is typically one or two orders of magnitude greater than what dental insurance covers,⁵ as LTCI policies typically cover perhaps $100,000 to $300,000 of lifetime expenses. But a multi-year stretch of highly expensive long-term care (e.g., five to 10 years of nursing home care) can cost multiples of that amount, potentially devastating the finances even of once-affluent retirees in the worst-case scenario. This is why I’ve identified long-term care as the greatest unsolved challenge in the field of goals-based retirement investing.⁶ This doesn’t make me Sherlock Holmes. Anyone who has requested a quote for LTCI knows we’ve got a problem.

Last year, here on Advisor Perspectives, I published an article called “My Dream Annuity.” The article led to multiple fascinating discussions for me, and I’ve subsequently learned of several extant and prospective solutions, not least the Stone Ridge LifeX Funds. With these heady outcomes as impetus, I thought I’d try my luck on another dream.

A better insurance: High dollar deductible LTCI

As noted above, most retirees will require some amount of long-term care, which attenuates the risk-pooling benefit of insurance. However, the charts above also make clear that a much smaller percentage of retirees require many years of long-term care, which circumstance is highly correlated with the financially devastating worst-case scenario.

This observation has led several observers (e.g., again, Kitces’s article) to call for “high-deductible” LTCI, to convert the product back into one that insures low-probability/high-impact outcomes. However, I employ quotation marks, because “high deductible” has heretofore been taken to mean long elimination period LTCI. That is, the deductible is defined in terms of how long a policyholder receives care—say, one to three years instead of the more common 90 days—before the policy begins to pay benefits.

But as an advocate for liability-driven/goals-based/safety-first investment techniques, this creates a problem. To put it simply, I can’t set aside “years” to cover my clients’ deductibles. But I can earmark dollars to do so.

The solution? High dollar deductible long-term care insurance: Instead of covering the first,⁷ say, $200,000-$300,000 of LTC expenses, my dream LTCI would treat the first $200,000-$300,000 of LTC expenses as a deductible and would cover everything⁸ above that.

For the goals-based financial advisor, the benefit of this arrangement should be clear: As with other goals, such as income, large one-time expenses, etc., we could set aside in advance assets designated to cover the LTCI deductible. Any assets ultimately not required for that purpose – i.e., for the fortunate majority who never require hundreds of thousands of dollars of paid care – would ultimately contribute to legacy.

This is not conceptually much different from present circumstances, wherein we often earmark otherwise unencumbered assets as “long-term care if needed, legacy otherwise.” But the huge difference between current LTCI and my dream LTCI is that the high but fixed⁹ deductible of the latter would allow for proper asset/liability matching. With my dream LTCI, it would become possible to immunize the long-term care liability, as we seek to do with other categories of expenses. Beyond the assets required for this immunization, extra dollars would be truly unencumbered, freeing us to invest them entirely in a manner appropriate to the clients’ heirs.

In addition to goals-based investing reasons to prefer a high dollar deductible to a long elimination period, consider the following examples of why such a policy would plausibly be a better product for a better price:

• The possibility of a relatively common, say, $20,000/year service need for the first three years, perhaps followed by more expensive care needs as health deteriorates, will drive up the actuarially-demanded premiums for long elimination LTCI – unnecessarily, for someone who can cover a high lifetime deductible.
• Conversely, if less commonly, an immediate need for three years of nursing home care at, say, $180,000/year, would add up to an enormous expense before a three-year elimination period would be exhausted, thus defeating the intended purpose of high (but not astronomical) deductible LTCI.

Why it should work, and why it might not

Of course, this concept only works if low-probability risk pooling sufficiently counteracts the higher maximum benefit to make such a product reasonably affordable. My theory is as follows:

1. Most policyholders would likely never receive any benefit. (Which is a good thing! Will you be sad if you never receive payment on your fire insurance? On your term life insurance? Your umbrella insurance? Exactly.)
2. The aggregate cost of LTC expenses beyond the deductible threshold should be (much?!) less than the aggregate cost of LTC expenses inside the threshold. That is, while a few older adults will incur upwards of millions of dollars of expenses, the majority who receive nothing (per #1) and those for whom benefit payouts are less than the deductible itself should bring the average payout down to a manageable figure for insurers, thereby bringing premiums down to a manageable level for policyholders.

I suspect item #1 is on solid footing, with evidence like the DHHS data above and, at least anecdotally, the relative rarity of worst-case outcomes. Item #2 is more speculative, but it seems reasonable, given both the low absolute levels in the “5 or more” columns in the DHHS charts and the rapid downward trend implied by the steep drop-off from zero to five years.

Regulatory hurdles could conceivably also impede the availability of this form of insurance. I would hope the state-by-state limits on elimination periods most often cited as obstacles to “high deductible” LTCI could be sidestepped by a truly high deductible insurance product where providers would presumably begin reporting expenses to the insurer immediately, to start accruing against the deductible. But I’m no expert in this area, and hope is not a strategy.

Finally, a sensible question: How does this help the many retirees who would go from not being able to afford the insurance premiums to not being able to afford the deductible? Unfortunately, it does not help them directly. Their fallback is Medicaid, just as it is now.

However, it is at least conceivable that government-provided LTCI programs could be buttressed by popular adoption of my dream LTCI. As a market-provided insurance solution for worst-case scenario care, it would lower the expected total cost to government backstop programs – not least by offering a better approach to the problem for retirees who presently may be tempted to shift or hide assets to accelerate Medicaid eligibility.

Might the greatest unsolved problem be solvable? Research results to come…

A few next steps readily suggest themselves:

1. I will reach out to some actuary contacts about generating pro forma actuarial calculations. It should be possible to get a better sense of the financial feasibility of high dollar deductible LTCI. I’m cautiously optimistic.
2. I have also begun to reach out to industry contacts for discussions regarding opportunities and potential impediments to the development of real, live insurance products around this concept.
3. Meanwhile, I will do what I can to raise awareness of the concept in my industry, to ignite the latent demand that I believe should exist among RIAs. After all, a product that costs less up-front and better protects the asset base from decimation could be in many of our clients’ best interests, in a manner plausibly conveniently conflict-free.

This article is my first volley aimed at #3. When #1 and #2 are further along, expect me to be back with more!

(In the meantime, if you’re interested in this concept or have suggestions or questions, please feel free to connect with me.)

In his roles as chief investment officer for Round Table Investment Strategies and portfolio manager for Torren Management, Nathan Dutzmann is responsible for applying financial science and investment research to the process of constructing portfolios tailored to the individual needs and goals of clients nationwide. Nathan was previously an investment strategist with Dimensional Fund Advisors and a partner and chief investment officer with Aspen Partners. He is also a member of the investment industry advisory council for The American College of Financial Services. He holds an MBA from Harvard Business School and a master’s degree in international political economy and a bachelor’s degree in mathematical and computer sciences from the Colorado School of Mines.

¹ I mean, sure, the fact that the other topics are neither areas of the slightest expertise for me nor particularly relevant to Advisor Perspectives may have played some role in the decision as well.

² Come on, admit it: You don’t really care about soccer.

³ Office of the Assistant Secretary for Planning and Evaluation, Office of Behavioral Health, Disability, and Aging Policy, Department of Health and Human Services, “Most Older Adults are Likely to Need and Use Long-Term Services and Supports” [January 2021], https://aspe.hhs.gov/system/files/pdf/265066/MostLikelyIB.pdf. My thanks to Wade Pfau for pointing out and summarizing the DHHS study in his magnificent Retirement Planning Guidebook.

⁴ DHHS defines a “serious” LTC care need as one requiring help with two or more “activities of daily living” (ADLs), such as eating, bathing, dressing, and things we wouldn’t want to talk about even if we wanted to talk about any of this stuff. LTC insurance typically uses a similar definition to determine eligibility for benefits.

⁵ But so are the premiums!

⁶ See here, for example.

⁷ I realize most current LTCI policies have brief elimination provisions that require the insured party to cover initial expenses, but that detail adds nothing but complication to an already complicated topic.

⁸ As with most medical insurance, I suspect a truly uncapped max lifetime benefit might be a nonstarter for long-term care insurers. But a max benefit of, say, $2MM would be high enough that even an ugly outlier event will very probably be covered. And an even worse worst-case outcome would still offer retirees a $2MM head start versus current offerings.

⁹ Perhaps “fixed” only in real-dollar (whether CPI or cost-of-care based) terms. Indeed, my dedicated readers (hello to both of you!) may wonder why I’m leaving inflation out of this discussion, given, shall we say, a not inconsiderable predilection for inflation protection and discussions thereof. The reason is simple: In this product, the best outcome for retirees would be if the premiums and the deductible were not increased for inflation. Perhaps such adjustments are likely, though, since the insurance company will want to protect itself. But hopefully and presumably the actuarial savings derived thereby would be shared with policyholders in the form of lower premiums.

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