How much long-term care insurance should you buy?

The Federal Long-Term Care Insurance Program is conducting an open season for enrollment that continues until June 24.

The program is always open for enrollment, but during the open season — only the second such opportunity since the program’s introduction in 2002 — active federal employees and their spouses or qualified domestic partners will circumvent the usual medical underwriting requirements in favor of an abbreviated underwriting process. This means that some applicants who would otherwise be declined coverage will be able to get into the program.

The open season raises the visibility of the Federal Long-Term Care Insurance Program and undoubtedly inspires many employees and annuitants to learn more about the program and consider enrolling. I consider the federal program to be the benchmark for long-term care insurance for eligible participants. This should be your default choice for insurance, and all other options should be carefully considered in comparison to this program.

Whether you should buy long-term care insurance can be a difficult question to answer. It usually takes a rather rigorous financial analysis to determine and compare the costs and benefits of paying the insurance premiums against the costs and benefits of self-insuring. In many cases, the insurance can be ruled out as an option because it’s simply not affordable. Like traditional disability insurance, long-term care insurance is expensive — often costing thousands of dollars per year for meaningful coverage.

Additionally, the premiums are not guaranteed to remain level, and have gone up in the past, so allowing for large increases in future premiums is essential. The last thing you want to do is pay tens of thousands of dollars in premiums over the years, only to have the coverage become unaffordable when you’re most likely to need it. In fact, the instability in the long-term care insurance industry, including recent changes in the benefits and premiums for the federal program, raise serious questions about the viability of today’s long-term care insurance as a reliable solution over the long term.

As a financial analyst, I am still trying to determine how to rationally factor the risks inherent in owning long-term care insurance into the cost-benefit equation.

Once you have decided to buy long-term care insurance, you’ll be faced with the tricky task of deciding how much to buy. The ltcfeds.com website has introduced the Online Consultant Tool, an interactive presentation that promises to guide you in designing a personalized plan. This means configuring the benefit choices to meet your needs.

The tool falls short, however. While it clearly walks you through the benefit choices and provides some insight into each one’s utility, it doesn’t address the real issue: how you should configure the benefits to best address your needs.

Rather than relying on emotional responses and irrational biases, this insurance, like all insurance, should be configured to adequately reduce your exposure to risk at the lowest possible cost. Unfortunately, the consultant doesn’t provide you with enough information about the risk you face.

It is possible to use historical population usage data, medical history and life expectancy to estimate the probability of an individual spending a certain amount of money on long-term care during their lifetime. With this information, it is possible to determine how much insurance is required to reduce the probability of exhausting the policy’s benefits to a given level.

I estimate the risk target for long-term care insurance should be something in the 10 percent to 20 percent range. That is: Buy just enough insurance so that the probability of exhausting the policy’s benefits is between 10 percent and 20 percent.

I have been performing this analysis for clients for at least 10 years. Adding this capability to the Online Consultant Tool would enable it to fulfill its promise.