More and more baby boomers reach retirement age each year, and naturally, a lot of attention is being given to their health care and long-term care needs, particularly the cost of that care. As with any large expensive need in our lives, insurance policies have been created to lessen the cost of these services, with something known as long-term care insurance (LTC insurance or LTCI for short). So, is long-term care insurance worth it?
LTC is a relatively new service (at least in the history of insurance) that has left many seniors and even younger individuals asking “What is a long-term care insurance policy and do I need one?” The short answer is it depends on your income level. Long-term care policies have pricey premium costs, making them unappealing to Medicaid qualifying individuals (that can have subsidized cost of care) and financially inefficient for those wealthy enough to self-insure.
To better understand why you may or may not need long-term health care insurance, it makes sense to break down it down into its two components: long-term care as a service and long-term care insurance as a means of paying for it.
What Is Long-term Care, and Is It Necessary?
The official definition of long-term care is “a range of services and supports you may need to meet your personal care needs.” Most long-term care is not medical, but rather assistance with everyday life’s basic personal tasks.
Examples of long-term care include nursing home, assisted living facilities and home. Long-term care is usually defined by help with the “activities of daily living” and anything from dressing and eating to moving around and going to the toilet.
While not medical in nature, long-term care is often needed most by those suffering debilitating medical conditions like strokes, Parkinsons or Alzheimer’s. However, old age catches up to all of us, and the American Association for Long-term Care Insurance predicts 68 percent of people who are 65 or older will require long-term care. This means over two-thirds of all seniors. It is not surprising then that 10 million Americans already have long-term care insurance.
Unfortunately for those who need it, not only is long-term care quite expensive, but the cost is rising over time. Estimates currently range from an average of $43k for care in an assisted living facility, to $92k for a private room in a nursing home. In two decades that price is projected to increase to an annual cost of roughly $131k – a 42 percent increase.
Most people don’t “choose” long-term care because they want to; it is usually a necessity based on one’s inability to care for themselves. Rising long-term care costs significantly outpacing inflation have made it financially challenging for many to afford it, even if they wish to.
When Is it A Good Idea To Get Long-term Care Insurance?
Now that you have a better understanding of what what long-term care is (as well as the associated cost) let’s get into some guidance on when it might be a good idea to obtain it.
First, the best time to get long-term care insurance is when you are young. As with life or health insurance, the older you are, the riskier your policy is considered, and the higher your premiums will be. Getting a policy at 45 compared to 60 could save you $440 a year on premiums for a standard three-year policy. However, if you wait until you you need it you likely will be denied.
You do not want to be too young and many life insurance companies will not even let you apply if you are under 30. A good way to evaluate your long-term care insurance value is to compare it to self-insuring through savings over the same period.
The main compromise between LTC insurance and self-insuring is how much you appreciate the flexibility of being able to spend your own savings, compared to the peace of mind of knowing you’ll get a higher coverage amount should you need long-term care.
Income level is the other main factor. If you have, or project to have a net savings of over $1 million, you can likely pay for own care. Similarly, if you make below $22,000 a year, long-term care insurance is probably out of your reach, and you may qualify for Medicare and Medicaid services. However, most Americans will fall between these two income thresholds.
What Should I Look For In A Long-term Care Policy?
When evaluating your long-term care policy, there are a few things to consider:
First is the benefit and elimination periods. You would need to know how long your policy will cover you and how long you need to wait after needing care before your coverage kicks in. These are functionally equivalent to a deductible and a policy value.
Lowering your elimination or waiting period will raise your policy’s monthly cost, as will raising your benefit period. Many long-term care insurance calculators start with a base of 36 months of coverage and a 90-day elimination period.
The other thing to examine is whether your policy has inflation protection. Because you are buying a policy for something you need in 25 or more years, the value could be significantly reduced. Most policies will include an inflation rider, and it will be up to you to determine what percent you want, and if you want compound or simple inflation protection.
It’s quite simple, the more inflation protection you get, the more your policy’s value goes up and the more your monthly premiums cost. Most individuals opt for three percent, though five is often offered.
Long-term Care Insurance – The Bottom Line
If you’re looking to buy long-term care insurance, you should always consider a few things: First, do you perceive needing long-term care, are you aware of what it entails, and how it differs from health insurance? Second, do you think you can pay to self-insure, and are you aware of how much your policy costs compared to savings towards a specified amount yourself?
When you have evaluated those decisions and made sure long-term care insurance is right for you, the next step is to determine what level of premium cost and coverage you’re comfortable with.