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When to buy Long-Term Care insurance

Consider the costs and benefits of LTC plans before you decide.

Skyrocketing long-term care insurance costs in recent years have turned an already expensive product into, for many, a downright unaffordable one.

This has created a massive quandary. After all, one of the biggest financial obstacles facing you is the cost of long-term care. Some 70% of Americans aged 65 and older are likely to need these services at some point, according to the Department of Health & Human Services. A private room in a nursing home costs an average of $142,254 per year (and as much as $155,125 in urban areas, such as New York City), while the average cost of an assisted-living facility is $51,600 a year, according to Morningstar.

This often leaves clients wondering – is there a good time to buy long-term care insurance?

The average nursing home stay is 2.2 years for men and 3.7 years for women – and 67.9% of people in long-stay nursing homes are women, who tend to need care more often and for longer periods than men do because they live longer.

Compounding the problem: LTC costs are not tax-deductible, and the coverage provided by health insurance or Medicare is minimal. The need to move to a nursing home, unfortunately, can bring with it devastating financial effects.

The mental stress for those without adequate means to pay for this care is harder to put a price tag on, but can be just as overwhelming. In the U.S., 41 million people are providing unpaid care for family members. Often, the caregiver is the spouse; 34% of unpaid caregivers are spouses, with an average age of 62.3. Rather than being able to look forward to the retirement they’ve worked toward their whole lives, they are now faced with the emotional and financial toll of caring for their spouse.

This is why it’s so important, no matter how old you are, to pay attention to LTC costs – and it’s why we routinely recommend that our clients purchase LTC insurance sooner rather than later. In 1994, a policy might have cost about $1,500 per year – today, that policy would cost $6,500.

These price increases don’t merely affect today’s buyers of LTC policies. They apply to all previous buyers. Unlike life insurance, for which premiums are guaranteed never to increase, the cost of long-term care policies can rise over time – and rise it has.

Prices are daunting enough that people either can’t afford them or are simply unwilling to pay the amount per year it takes to insure a married couple – especially since they don’t know whether they’ll actually use the insurance.

Despite all this, we maintain the view that long-term care insurance is something you can’t afford to be without. Policies are expensive because the cost of care is expensive, and while paying $10,000 or so a year is unpleasant, it’s far better than spending $100,000 every year for several years if care is needed.

To balance your need for coverage against the rising costs of that coverage, there are generally four broad viewpoints that can provide guidance about when to buy long-term care insurance. (Please note that partnership plan rules can vary by state so please seek the counsel of professionals before purchasing anything. A financial planner can help tailor an approach for your unique circumstances.)

If you’re younger than age 50 and do not have good personal and family health histories, or if you’re 50 or older and don’t currently own long-term care insurance:

We recommend that you consider purchasing LTC insurance if you haven’t already done so. In addition to suggesting that you compare traditional LTC insurance policies with LTC state partnership plans, we recommend that you consider hybrid LTC policies.

When you buy a traditional long-term care policy, you pay monthly, quarterly or annual premiums. When you need assistance with two or more activities of daily living (walking, eating, bathing, toileting, dressing and transferring from bed or chair), you qualify for benefits under your policy. Your policy will dictate how much money you will receive and how long you’ll receive it – and whether your benefits will rise with inflation.

The more benefits you want, the more the policy will cost. If you exhaust your policy’s benefits but still need care, you’ll have to use your savings and investments. If you run out, you’ll become eligible for Medicaid.

It’s the possibility of running out of money that caused states to create partnership LTC plans. After discovering that many people were going broke paying for care – forcing state-funded Medicaid programs to take over the costs – states created an incentive to buy LTC insurance (reducing reliance on Medicaid).

The incentive: Instead of requiring you to spend all but about $2,000 of your own money on care to qualify for Medicaid, the states let you keep as much money as you received in long-term care insurance benefits. So if your policy pays you $300,000 in benefits over several years before reaching its limit, you get to keep $300,000 in assets and still qualify for Medicaid.

Partnership policies can be complicated, and in some states, they are far more expensive than traditional policies.

Therefore, a careful analysis of each is required to determine which is better for you. Both types of policies suffer a mutual drawback: If you never file a claim, you never get any money back, regardless of how much you’ve spent on premiums.

But when we add to that the fact that premium costs have soared and are likely to rise further, coupled with our expectation that long-term care services will become virtually extinct in coming decades, hybrid policies are now more attractive than they were.

If you’re younger than age 50 with good personal and family health histories:

We would generally not recommend the purchase of LTC insurance. Instead, you should consider self-insuring, meaning you should save as much as possible (including what you would have paid in LTC insurance premiums) so you have the funds to pay for long-term care services, should you or your spouse or partner need them.

Why? First, today’s policies cost significantly more than they did in years past (and we expect further increases in the future). Second, those who ultimately use long-term care services typically don’t need them until they’re in their 70s – and sometimes not until their 90s. That’s 20-40 years away for those younger than 50. Third, we believe advances in exponential technologies – including medical innovations in science, neuroscience, physiology and psychology – will reduce the need for long-term care by 2030. This means that people younger than age 50 with good personal and family health histories are less likely to need LTC services, so paying for such insurance now is less urgent.

If you already own a long-term care policy:

If the current price of your policy is making it unaffordable, talk to the agent or financial advisor who provided it to you. Recognizing the price issue, many insurance companies are letting policyholders alter their contracts to make them more affordable.

Changing the waiting period, daily benefit, years of coverage, inflation protection or other features could reduce the annual cost while ensuring that you still have protection.

It might also be worth comparing your policy to others, including hybrids. Ask your insurance agent or financial advisor to show you proposals. But be careful that an agent doesn’t try to persuade you to buy a new policy simply to earn a fresh commission. Keeping your policy might be your cheapest and best option.

If you don’t have a long-term care policy:

Talk to an independent financial advisor for help in determining whether now is the right time to buy long-term care insurance. If an LTC policy is in your best interests, have him or her recommend one that is affordable and meets your needs. If you don’t have an advisor, we are happy to help you.

If you have questions about any of this information and how it applies to your situation, contact us today.

 

Neither Financial Engines Advisors, L.L.C. nor any of its advisors sell insurance products. Edelman Financial Engines affiliates may receive insurance- related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.

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