Gas station without pumps

2018 March 2

Long-term care insurance

Filed under: Uncategorized — gasstationwithoutpumps @ 20:59
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Every year, I get a letter from the State of California’s Department of Health Care Services urging me to get long-term care insurance, but the reasoning in the letter never makes sense to me.  They say

Most of us have fire insurance on our homes, even though only 1 out of 1,000 home owners will ever have a serious fire. Consider that 700 out of 1,000 of us over the age of 65 will need some type of long-term care.

OK, I’ve considered it, and their argument makes no sense at all. Insurance is a trade-off—you pay somewhat more than the expected cost of something, in order to reduce the variance.  So for fire insurance, if you have a 1/1000 chance in 40 years of a $1 million loss, then the expected cost per year is about $250, but people are willing to pay about $1000 a year to reduce that loss to a few thousand if it does occur.  The variance is now quite small (almost constant cost whether or not there is a fire), rather than high probability of no cost with a low probability of enormous cost.

But it long-term care is almost always needed, then insurance is not the right vehicle for dealing with it—savings is.  The cost of the insurance would be more than you would need to save (otherwise the insurance company would make no profit), and if you turn out not to need the long-term care, you would still have the savings, but insurance premiums would be gone.

The only justifications I could see for long-term care insurance are

  • if there is a very small probability of needing very expensive care, so the insurance reduces the probability of a disastrous outcome, or
  • as a forced savings plan, because people can’t be trusted not to spend the money that they have set aside for the possibility of long-term care.

Whole-life insurance used to be used as a form of forced savings, which turned out to be very profitable for insurance companies, but very bad deals for consumers. (Separate term insurance and other forms of savings were much better financially.)  So I don’t trust insurance companies to devise good forced-savings plans.

That only leaves the very small probability of needing very expensive care as a possible justification, and the letter sent out each year implies just the opposite—that there is a very high probability of needing long-term care.  I wish that they provided real information—like the probability distribution of cost of long-term care for the population, so that I could figure out how much risk was really being covered by the insurance.

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