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Is long-term care insurance worth it for you? Here’s how to tell

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Determining whether long-term care insurance is worth buying now, later, or not at all depends on a number of factors, including your age, health, and financial situation.

Below are hypothetical scenarios demonstrating how these factors can make long-term care insurance a great deal or not-so-great deal.

Long-term care scenarios based on age

According to the National Association of Insurance Commissioners (NAIC), the life expectancy for people who reach age 65 is between 19 and 20 years.

The longer people live, the greater the chance they may require long-term care. NAIC reported that about 70 percent of people who reach age 65 are expected to need some form of long-term care at least once in their lifetime.

So, what is the ideal age for purchasing long-term care insurance?

In one scenario, a 55-year-old woman buying a $5,000 monthly benefit for a maximum of 36 months will spend about $360 a month in premium. The policy has a 90-day waiting period, meaning the policyholder will have to pay the first 90 days of care out of their own pocket before benefits kick in.

In this hypothetical scenario, the woman requires long-term nursing home care at the age of 55. That means she paid premiums for 20 years before collecting benefits. Assuming the premium amount did not increase over those 20 years, she would have paid a total of $86,400 in premium.

If she used the entire $5,000 monthly benefit, the policy would pay for itself in roughly 17 months following the 90-day waiting period. This person would still have about 19 months' worth of coverage after that.

Now consider the same scenario for a 45-year-old who won’t require long-term care for 30 years.

On the one hand, her premium will be $285 a month, $75 a month less than the 55-year-old. On the other hand, the total amount of premium she’ll pay over 30 years is $102,600, or $16,200 more than waiting until age 55. It would take 20.5 months after the 90-day waiting period for the policy to pay for itself.

Finally, consider the cost of waiting until age 65. The premium cost is an estimated $515 a month. The total premium paid over 10 years would be just $61,800. Following the 90-day waiting period, the policy would pay for itself in just over a year.

In summary:

  • The 45-year-old pays $102,600 in total premium with a policy payback of 20.5 months.
  • The 55-year-old pays $86,400 in total premium with a policy payback of 17 months.
  • The 65-year-old pays $61,800 in total premium with a policy payback of 12 months.

One factor to consider is that, according to the National Association of Insurance Commissioners (NAIC), the average nursing home stay is one year.

Yes, it seems it would make sense to wait as long as possible, but potential buyers run the risk of incurring health conditions as they age that could disqualify them from coverage. The risk for all three individuals is that they spend this money and never need long-term care.

The bottom line is that there really is no “ideal age” to buy long-term care insurance. Every person’s situation and needs differ. The only thing you can be sure of is that the annual cost of insurance will never be cheaper than it is today.

Learn More: How Much Does Long-Term Care Insurance Cost?

Will long-term care insurance pay off financially?

How does your financial situation impact your need for long-term care insurance?

As with all insurance, long-term care insurance is designed to protect people’s assets from the high cost of an unplanned occurrence. By paying a manageable premium amount over several years, a long-term care insurance policyholder can avoid incurring a massive expense in the event long-term care is needed.

Long-term care insurance premiums can be expensive. So if you already have a tight budget and don’t have many assets, you probably don’t want to consider long-term care insurance.

You need long-term care in 20 years which is estimated to cost $400 a day. Factoring in inflation, the estimated cost for two years of care would be just over $296,000. You’re also on track to have $500,000 in savings by then.

Without long-term care insurance, you would deplete 60 percent of your savings in two years to pay for your long-term care.

On the other hand, if you had a policy that paid a $10,000 monthly benefit — following a 90-day waiting period — you would only spend $84,000 out of pocket. That still leaves $416,000 in savings.

However, to get that $10,000 monthly benefit, it would cost you an estimated $840 a month in premium over 20 years, assuming you bought the policy at age 60. That would be a total of $201,600. Add it to the $84,000 spent out-of-pocket for care, and it would cost you $285,600.

One thing to keep in mind is that amount is over 20 years, whereas the $296,000 in the non-insured scenario is over a two-year period.

[ Related: 3 financial considerations when caring for aging parents ]

Long-term care scenarios based on health

Whether long-term care insurance turns out to be a benefit will also depend on the extent to which you need care.

According to NAIC, the average annual costs for long-term care services in 2018 were:

  • $89,297 for a semi-private nursing homeroom
  • $48,000 for a one-bedroom unit in an assisted living facility
  • $34,320 for a home health aide that visits 30 hours a week

More serious long-term conditions will require more expensive nursing home care. But NAIC’s report shows less than 13 percent of Americans who require long-term care live in nursing homes.

Using these averages, imagine you bought a $7,500 monthly benefit and paid the $625 monthly premium for 20 years before you needed care. That came to $150,000 in total. The policy would have covered you for three years, but you only required care for two years. Plus, there was a 90-day waiting period on the policy in which you covered care costs out of pocket.

If you lived in a nursing home for two years, you would have paid $22,325 out-of-pocket during the 90-day waiting period. The remaining cost would be covered by the policy. And you used nearly all of your monthly benefits for two years, so you didn’t really overpay for your coverage.

If had to pay for assisted living, there would be a $12,000 out-of-pocket cost for the waiting period. The remaining cost would be covered, but you overpaid a little because you only needed $4,000 per month in coverage, not $7,500.

You could have bought a $4,000 monthly benefit for $335 a month over 20 years. That would have equaled $80,400 in total premium, nearly half as much as what you would have paid for $7,500 in coverage.

For a home health aide, your 90-day out-of-pocket cost would be $8,580. The remaining cost would be covered, but you overpaid more because you only needed $2,860 a month instead of $7,500.

You could have purchased a $3,000 monthly benefit for $250 a month over 20 years. Your total lifetime premium cost would have been $60,000, 60 percent less than the $150,000 paid for a $7,500 monthly benefit.

[ Related: How your family health history can influence financial decisions ]

You won’t know until it’s too late whether it was worth it

It’s difficult to determine the right time to buy long-term care insurance and how much coverage you actually need. In some cases, there’s a question of whether you should get coverage at all.

It’s always difficult to buy insurance because you’re always hoping to never use it even though you pay for it. What makes long-term care insurance tricky is the cost involved plus the fact that people tend to buy it at older ages when they may not have discretionary income to spend on coverage.

You should work with a licensed professional to help you determine the need for and the right coverage for your situation. Start by researching what industry experts believe various long-term care options may cost at different points in the future.

You can help protect yourself by having enough long-term care coverage to at least cover the lower end of those estimates. It’s also helpful if you can create a plan where a combination of insurance and your own wealth can cover the worst-case scenario in your potential long-term care needs.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published April 7, 2021
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