When is the Best Time to Buy a Long-Term Care Policy?
By David K. MacLeod, CFP, CFA
The long-term care (LTC) insurance market has emerged in recent years from a painful period of rising premiums. Many insurance carriers decided to completely leave the market. Many of our clients received notices in the mail that their policy premiums were going up by 50% to 90%. LTC insurance premium increases on new policies have been higher, making them more expensive than existing policies, even for young and healthy buyers.
With expensive premiums as a backdrop, it’s reasonable to wonder if this is the best time to buy long-term insurance or if it’s better to wait.
First, it may be helpful to review the basics. Long-term care insurance protects buyers against the risk of needing unaffordable long-term care services. Health insurance does not typically cover long-term care services. Services include receiving in-home assistance with activities of daily living like bathing and dressing. It could also mean having a private room in a nursing home, which can cost over $10,000 per month, especially in high cost areas like Orange County, California.
When shopping for long-term care insurance, there are several characteristics to be aware of. Most policies have a 60 or 90 day waiting period before benefits kick in. The daily benefit is the amount the policy will pay out per day, regardless of total care expenses. For example, if a nursing home costs $350 per day and a policy’s daily benefit is $250 per day, you are responsible for $100 per day. An inflation protection rider increases the daily benefit amount by an inflation rate. The benefit period, typically three to five years, is the length of time long-term care expenses will be paid by the policy.
Here are considerations to help you decide if now is a good time to buy long-term care insurance:
High net worth people may decide to self-insure. If you have enough investment assets such as stocks, bonds, and real estate to cover care costs in the unlikely event care is needed for years, you may not want to buy long-term care insurance.
People who are significantly behind on retirement plan may want to delay buying long-term care insurance. Money that would be allocated toward premiums may be better allocated to retirement accounts.
If premiums don’t fit into your budget or you’re unsure if you can commit to paying premiums for 10 to 20+ years, it may be best to delay purchasing.
Insurance underwriters may disqualify you if you are older or dealing with serious health problems. Underwriting standards have become stricter in recent years.
Younger people (i.e. under age 50) who may not need care for decades and are in good health may want to delay purchasing to avoid paying premiums for decades.
Consider your potential risk. What is your family health history? Is it likely a family member would be able to care for you? Would you prefer a more expensive type of care such as 24-hour home care or private room nursing home care?
Some people can take tax deductions for part or all of their long-term care insurance premiums paid. After taking the tax deduction into consideration, the insurance may be a lot more affordable.
A scenario where long-term care makes a lot of sense is for a healthy 60 year old married couples who are on track with their retirement planning, have the ability to make the premium payments, and don’t have a high enough net worth to self-insure the risk of requiring expensive care later in life. If we imagine a worst-case scenario, all of a couple’s assets could be spent paying for one spouse’s care. After the cared-for spouse passes away, the surviving spouse can be left with no assets to support himself or herself in retirement.
We encourage you to speak with a fee only financial planner to see if a long-term care insurance policy makes sense for you.