GF591 Unit 7 Long Term Care Cost and Policy Analysis Example

Priced in the Year It Happens: A Unit 7 Long-Term Care Analysis for a Couple in Their Late Fifties

[Student Name]

Purdue University Global

GF591: Individual Insurance Planning

Unit 7 Long-Term Care Analysis

[Instructor Name]

[Date]

The couple, the care episode, the policy and the premiums are composite and illustrative; cost data and research cited are real.

Assumptions

1. Today's costs. Assisted living at $5,900 a month and home care at $33 an hour, both close to recent national medians (Genworth Financial, 2024). Forty-four hours of home care a week costs about $6,292 a month.

2. Care inflation. 4 percent a year, set above general inflation because care costs have tended to rise faster than prices overall.

3. Timing. She is 58 now. The episode modeled begins at her 83rd birthday, 25 years from now.

4. Episode. One year of home care followed by two years in assisted living, a common path when needs grow gradually.

5. Medicare. The federal program for retirees covers short skilled stays after a hospital admission but not years of personal assistance, so it contributes nothing here (Brown & Finkelstein, 2011).

Cost Projection

At 4 percent a year for 25 years, each dollar of today's cost becomes about $2.67.

1. Home care rises from $6,292 a month to about $16,773.

2. Assisted living rises from $5,900 a month to about $15,728.

The episode, priced at those age-83 rates:

1. Twelve months of home care: about $201,276.

2. Twenty-four months of assisted living: about $377,472.

3. Total: about $578,764.

The projection holds these rates flat across the three years for simplicity; with costs still rising during the episode, the total would be somewhat higher.

The Policy Schedule

The proposed policy pays up to $5,000 a month today, from a total benefit pool of $180,000, a waiting period of ninety days before benefits begin, and benefits that grow 3 percent a year, compounded.

Converting the policy to the same future year is the step where most analyses go wrong. At 3 percent compounded for 25 years, each dollar of benefit grows to about $2.09.

1. The monthly maximum grows from $5,000 to about $10,469.

2. The pool grows from $180,000 to about $376,880.

The policy's benefit grows at 3 percent while care costs are assumed to grow at 4 percent, so a policy that covers about 79 percent of a month's home care today would cover only about 62 percent of it at 83.

Applying the Policy to the Episode

1. Elimination period. The first three months are paid by the family: three months of home care at about $16,773, or about $50,320.

2. Covered months. For the remaining 33 months, the policy pays its maximum of $10,469 a month, since actual costs exceed it throughout. That totals about $345,473.

3. Pool check. $345,473 is within the $376,880 pool, so the pool is not exhausted during this episode.

4. Remaining cost. About $233,291, including the elimination period.

Who Pays the Remainder

Payers are listed in the order they would be drawn.

1. Income. By 83, the couple's pensions and Social Security will continue. Some of that income can go to care, but the healthy spouse still needs to live on it.

2. A dedicated reserve. The plan sets aside a care reserve within their investment accounts, targeting about $150,000 in today's terms by the time she is 80.

3. Home equity. If she moves to assisted living and he stays at home, equity is less accessible. If both move, the house can be sold.

4. Medicaid as a last resort. Medicaid pays for long-term care only after most assets have been spent down. Research shows that Medicaid's role as a secondary payer reduces the value of private policies for many households, since part of what a policy pays would otherwise have been paid by Medicaid (Brown & Finkelstein, 2008). For this couple, with substantial assets, that effect is smaller.

Why Model Her Care and Not His

The analysis models her care because she is younger and, as a woman, more likely to live long enough to need extended care, and because when he needs care first she is likely to provide much of it at home. His episode, if it came, would probably be shorter and partly covered by her help. Both spouses would be insured under the proposal, and a shared pool rider was considered, which lets either spouse draw on the other's unused benefits. It adds cost but protects against the case in which one spouse needs far more than the other.

Premium Risk

The illustrative premium is about $6,200 a year for both spouses. That premium is not guaranteed. Long-term care contracts allow the insurer to raise premiums for a whole class of policyholders with state approval, and many have done so. If the premium rose 50 percent at age 70, the couple would face a choice between paying more, reducing benefits or letting the policy lapse after paying for years.

Conclusion

The policy would pay about 60 percent of the modeled episode. That makes it valuable protection against a long, expensive care need, but not a complete solution. The couple should decide whether a reserve and home equity can carry the rest, and whether they are comfortable with the risk of future premium increases. A policy with 5 percent inflation protection would close more of the gap at a higher premium and should be quoted before they decide.

References

Brown, J. R., & Finkelstein, A. (2008). The interaction of public and private insurance: Medicaid and the long-term care insurance market. American Economic Review, 98(3), 1083-1102. https://doi.org/10.1257/aer.98.3.1083

Brown, J. R., & Finkelstein, A. (2011). Insuring long-term care in the United States. Journal of Economic Perspectives, 25(4), 119-142. https://doi.org/10.1257/jep.25.4.119

Genworth Financial. (2024). Cost of care survey 2024.