BUSI 421 Week 6 Discussion Board Forum 2 Example

Discussion Board Forum 2: Planning for Long-Term Care

BUSI 421 Insurance and Risk Management, Discussion Board Forum 2 Thread and Reply

Thread by [Student Name]

The forum prompt, the clients and the classmate are composites; the Dalton text and the research cited are real, and the structure follows Liberty's public course guide for BUSI 421.

Thread

Long-term care is one of the largest financial risks retirees face, yet relatively few people buy insurance against it. Dalton et al. (2017) explain that Medicare pays for only limited skilled care after a hospital stay, so ongoing custodial care, help with bathing, dressing and eating at home or in a facility, is paid by the family, by private insurance or, once assets are largely exhausted, by Medicaid. Why, then, is the private market so small?

Brown and Finkelstein (2007) offered one answer. Because Medicaid pays for care after a person's assets are spent down, a private policy for a person of modest wealth mostly pays for care that Medicaid would otherwise have covered. Their analysis found that this implicit tax left private coverage unappealing for most households below the upper part of the wealth range, and this held even when premiums were assumed to be actuarially fair. For many households, declining coverage is a reasonable response to the rules.

A second answer is psychological. Gottlieb and Mitchell (2020) found that people who frame insurance narrowly, judging each policy as a separate gamble rather than as part of their overall financial plan, were less likely to own long-term care insurance. Viewed alone, the policy looks like a bet the buyer will probably lose; viewed as part of a plan, it protects everything else the plan is meant to achieve.

Together the findings point to the clients for whom coverage makes sense. Households with little wealth are well served by Medicaid. Very wealthy households can pay for care from their assets. The middle group, retirees with perhaps several hundred thousand to a few million dollars who want to protect a spouse's lifestyle or an inheritance, or who want to choose their own care rather than accept what Medicaid provides, are the natural buyers. For them, the policy features Dalton et al. (2017) describe matter: the daily benefit, benefit period, elimination period and inflation protection. A 90-day elimination period and a benefit period of three years, with compound inflation protection, cover the most expensive scenarios at a lower premium than lifetime coverage. Buying in the late fifties or early sixties, while health still allows underwriting approval, usually keeps premiums manageable. A couple aged sixty with $1.2 million in savings is a good example: an extended stay in a facility for one spouse could consume a large share of the assets the other spouse needs to live on.

Reply to Andre

Andre, your plan to self-insure by setting aside $150,000 for possible care is thoughtful, and for some clients self-insurance is the right choice. I would test the number, though. If care costs around $100,000 a year in a facility and an average stay lasts a few years, the reserve could be gone well before care ends, and prices tend to rise faster than general inflation. Your plan also works only if the money is never used for anything else, which is hard to guarantee over twenty years. One option to consider is a hybrid life insurance policy with a long-term care rider, which pays a death benefit if care is never needed, a feature that answers the narrow-framing worry that premiums are wasted. A third path is a smaller traditional policy that covers the first two or three years of care, with the reserve covering anything beyond, which shares the risk between insurance and savings. Would your client be open to comparing these options?

References

Brown, J. R., & Finkelstein, A. (2007). Why is the market for long-term care insurance so small? Journal of Public Economics, 91(10), 1967-1991. https://doi.org/10.1016/j.jpubeco.2007.02.010

Dalton, M. A., Dalton, J. F., Langdon, T. P., & Gillice, R. R. (2017). Insurance planning (5th ed.). Money Education.

Gottlieb, D., & Mitchell, O. S. (2020). Narrow framing and long-term care insurance. Journal of Risk and Insurance, 87(4), 861-893. https://doi.org/10.1111/jori.12290