Most people have to think about buying long-term-care (LTC) insurance. Your parents may be considering it, whether they’re still working or retired. The purchase often presents the most nagging insurance question for people over 50.
What’s more, LTC coverage may not be necessary or affordable. Before buying, take the following into account:
Family status. Consider the financial risk of incurring out-of-pocket expenses for long-term care: impoverishing a spouse, partner, or other financially dependent family member. Single people don’t face that risk, so all other things being equal, they have less need for LTC insurance.
Affordability. Most LTC experts say the ideal candidates for long-term-care coverage are those who can comfortably afford the premiums and can handle premium increases, which are becoming quite common.
Your general financial picture also determines how affordable LTC policies are for you. One common measure is net worth, excluding the home, or more simply, the amount of investments and savings you expect to have after you retire. People with less than $500,000 in investments might not be able to afford LTC coverage.
Another more reliable measure of affordability is how much the insurance will cost as a percentage of your expected retirement income. If the premiums are likely to consume more than 10 percent of your income, you probably can’t afford the coverage.
Singles with more than $1 million in investments, and married or partnered couples with more than $1.5 million in investments, may want to consider self-insuring. If this describes you, though, remember that a long stay in a nursing home or extended home-health care could whittle down even a large nest egg.
Family health history. Not a perfect predictor, the health patterns of parents and grandparents can still indicate what the future may hold. If your parents experienced chronic health problems or other conditions that required prolonged care, this may argue in favor of an LTC policy.
Importance of passing on an inheritance. If passing on an inheritance is important to you, an LTC policy could protect some of your assets for future generations.
Before Buying a Policy
An LTC policy can be an expensive, long-term investment. Consider the following:
Understand the limitations and features of the policy. Long-term-care insurance is aggressively sold. Many purchasers don't understand what they're getting—or not getting.
Become an expert on long-term-care insurance before buying a policy. Its premiums could be one of your biggest retirement expenses. So make the most of your hard-earned dollars.
If your employer offers LTC insurance, consider it. But while policies offered through an employer may be less expensive, the benefits may not be as comprehensive as you would like.
Favor policies that provide comprehensive home health-care coverage and coverage for nursing homes. Inflation protection is also an important feature, particularly for boomers who are considering this coverage.
Instead of buying long-term-care insurance, consider using the money you would pay in LTC premiums to invest in other ways. Think on this: According to a 2005 study published in the journal Inquiry titled "Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect?," only 37 percent of all 65-year-olds will need long-term care in a nursing home or assisted-living facility. Most will stay less than two years.
You can cut premium costs by limiting the LTC policy to three years or less. However, if you spend much longer than that in a nursing home, you may impoverish yourself anyway. According to the study I mentioned, 8 percent of us will spend more than five years in a “nursing facility.”
If you're worried about nursing-home costs draining your resources, consider investing some of your retirement savings in an annuity. That assures you and/or a surviving spouse or partner a lifetime source of income that won’t be forfeited to the nursing home.
You may lower premium costs by eliminating all the expensive bells and whistles while keeping the inflation kicker. Lowering the daily reimbursement rate and increasing the waiting period until benefits kick in also lowers premiums.
If you can only afford to insure one person, women are more likely to spend extended periods in nursing homes.
Factor-in the possibility that your LTC premium will increase. Many policyholders have had to endure premium increases of 50 percent or more in a single year. Those burdened by increasing premiums can pay the higher cost, pay the original premium by accepting scaled-back coverage, or let the policy lapse.
While you’re in the market for a new policy, ask the agent or the insurance company whether or not premiums on policies they’ve previously issued have gone up. If premium payments have increased, find out how much.
Instead of LTC, you or your parents could also think about continuing-care communities. These communities provide all levels of care—independent living, assisted living, and nursing-home care. By choosing a continuing-care community, you may eliminate the need for an LTC policy.
When Should You Buy an LTC Policy?
Keep in mind that the annual premiums for LTC coverage are much higher if you wait until your 60s or later to take out a policy. Few experts recommend purchasing coverage before age 50. After age 70, premiums may become prohibitively expensive.
While you’ll pay lower premiums if you buy a policy at a younger age, keep in mind that you’re likely to pay a long time before collecting benefits, if ever. The average age at which people enter nursing homes is 83.
On the other hand, a compelling argument for purchasing a policy at a younger age is that health issues could render you uninsurable at an older age. Buy an LTC policy at a younger age if any of the following apply:
- If your health is deteriorating
- If you engage in high-risk activities
- If your family has a history of early disability
If your fear of the unexpected is robbing you of sleep, you may want to obtain coverage now rather than waiting. Too, decisions of equal importance are whether you can afford the premiums or are wealthy enough to self-insure.
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