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Tuesday, November 14, 2023

Should You Buy Long-Term Care Insurance?

Is long-term care insurance a good investment, or is it better to self-insure? How about a little of both?

More than half of Americans who make it to 65 are going to need long-term care at some point. Medicare will not cover the bill. Medicaid requires that the older adult meet strict financial guidelines, and the program will not pay to put you up in the Taj Mahal of nursing homes. But with an average insurance cost per couple of about $6,000 per year and the risk of premium hikes in the future, does it make sense to buy long-term care insurance (LTCI)?

Trade-Offs of LTCI vs. Self-Insuring

Consider that you may be paying premiums for decades for a policy you may never need. And if you do use your insurance, you may only need it for a short time: potentially not enough to offset all those dollars you’ve been paying into it. Your policy will usually only offer a certain amount of benefits limited by time and dollars, and most have a waiting period (often 90 days) before they go into effect. Would you be better off investing the dollars you would otherwise spend on premiums to help cover a possible stay?

Will You Qualify for Long-Term Care Insurance?

You may not qualify for LTCI if you have certain pre-existing conditions, such as certain cancers or if you already need help with one or more activities of daily living, such as bathing or dressing. Premiums rise the older a person is, so if you wait too long the insurance may be unaffordable, but if you buy it early, you will be paying more overall in premiums, which can rise over time. However, buying a policy with your spouse may be cheaper than two separate policies.

The decision comes down to what enables you to sleep well at night, according to Certified Financial Planner Roxanne Alexander. Some clients are able to self-insure; they have enough saved up that they can afford to pay for the cost of a prolonged stay if needed. Mind you, that may run about $8,000 per month, depending on which state you live in. Others want the peace of mind that comes from knowing an insurance company will shoulder a portion of the cost. After all, you have home insurance that you will probably never need, but you wouldn’t dream of dropping it. 

Many folks choose to combine a long-term care policy with savings to cover any future needs. In other words, they buy a policy they know won’t cover 100 percent of the cost for as long as they may need care, but it covers enough that they can manage the rest of the outlay when the time comes. 

LTCI Policies

Historically, the performance of LTCI policies sold in the 90s was less than stellar and they got a bad name. About half of the policies were never used because their owners couldn’t afford, or forgot to continue, making payments. Benefits didn’t get paid out to those who paid only for nursing home care, but instead wound up receiving in-home care or moved to a residence that wasn’t covered by their policy. And it still can be true that by the time LTCI benefits are paid out, they often make up only a portion of costs due to inflation.

Consumer groups urged changes in terms and conditions after the 90s that make LTCI a better investment today. For instance, a lot of policies will now cover stays in residence homes or at-home care as long as the policy holder is unable to perform a certain number of activities of daily living (ADLs) such as dressing and toileting. Policies may also permit the holder to reduce levels of coverage in return for lowered payments. 

Here are some areas to consider when comparing policies:
  • Does the policy cover not only nursing homes, but also assisted living facilities and at-home care?
  • Does it have any inflation protection?
  • Can the company increase the cost of the policy at will?
  • What is the length of coverage? Does it go for one year, two, three? 
  • Can you stop and restart it if needed?
  • How are benefits triggered? 
  • What is the elimination (waiting) period before benefits kick in?

Additionally, there are some other reasons long-term care insurance may be right for you. If you own a tax-qualified plan and itemize deductions, premiums may be deductible in part or in whole. This is especially important for business owners. There are also benefits if you would otherwise need to spend down your assets to qualify for Medicaid. Further, you won’t be a burden on your heirs in future years. 

Hybrid Long-Term Care Policies

It’s possible to get a policy that combines whole (permanent) life insurance with LTCI. Any monies needed for long-term care come out of your death benefit, or payout to loved ones upon your passing. But these policies are typically quite expensive, and if you don’t need life insurance, you probably don’t need a hybrid policy. 

There is definitely a place for a long-term care policy in many portfolios. The peace of mind afforded by knowing a good chunk of care will be paid for is essential to many retirees. Just make sure to look at a few different policies and take time to go over the provisions in each at your leisure before making a decision. You want to get the terms and conditions you need at a price that is among the lowest in the industry. And since you likely won’t be using the policy for a while, make sure the company whose policy you buy will be around for a long time to come.