When to Buy Long-Term Care Insurance

Published on February 19, 2019 by Kamran Rosen in Life Settlements, Retirement Planning

Senior couple happy to buy long term care insurance.

Between now and 2030, it is predicted that roughly 10,000 baby boomers will hit retirement age every single day. And if you count yourself among these 76 million Americans, there’s a 68% chance at some point you’re going to need long-term care. So, may be wondering when to buy long-term-care insurance.

Long term care, not to be confused with health-care or medical procedures, is care that assists with “a range of services and supports you may need to meet your personal care.” In other words, care you may need to help with the activities of daily living. While long term care has traditionally been thought of as nursing homes or assisted living facilities, much of modern long term care has in fact been in-home care.

The problem with so many Americans retiring en masse, is that the pressure has caused a sharp rise in the cost of long term-care services. Between 2016 2017, long term care costs saw rate increases of 4.5% – nearly 3 times the rate of inflation – according to a survey by Genworth Financial.

Rising long term care costs have left Americans wondering, “How will I pay for care if I need it?”

The answer for roughly 10 million Americans has been long term care insurance (abbreviated as LTC insurance). However, relative to life insurance and health insurance, long term care care insurance is still fairly underutilized. Some of the reason stems from unawareness, and some of it stems from fairly high annual premiums, relative to other insurance products.

To understand if a long term care insurance policy is right for you, it’s thus very important to understand what the costs are, as well as when it makes sense to buy a LTC policy.

Should You Even Buy Long Term Care Insurance?

This is the first thing to evaluate. The answer ultimately depends on a variety of factors, but a general guideline is income. If you are a Medicare eligible individual, a long term policy is likely too expensive for you. Furthermore you will likely be qualified for Medicaid when you are older, and this should help to offset the long term care costs.

On the other side of the spectrum, if you project to have a net worth of $2.5 million by age 65, or are pulling less than 4% out of your savings every year, you’ll likely be able to self insure.

Those who feel confident in their investment abilities may choose to dedicate the cost of premiums to another interest bearing account, and pay for care themselves should they need it. The inherent trade off is flexibility with your money versus peace of mind of coverage should you need care.

However these income thresholds apply to very upper and lower ends of the spectrum. The vast majority of Americans will find themselves in the middle.

Senior couple discussing when to buy long term care insurance.

What is the Best Age To Buy Long Term Care Insurance

Probably the most common question people ask. If you’re below age 30, you’re not even eligible to get a long term care policy, and if you’re over 75, most insurance companies won’t issue you coverage. The American Association for Long Term Care Insurance recommends most people look into long term care policies in their mid 50’s.

The reason for this trying to hit the sweet spot with your premiums. If you wait too long to get a policy, your premiums will increase sharply – or worse – you’ll be denied a policy. One fourth of individuals age 60-69 get denied from long term care policies.

Yet if you get a long term policy too earl, you risk overpaying for premiums for longer than you need. Getting a policy before you’re 60 – and particularly before age 65 – helps lock in rates associated with good health conditions.

Two factors to consider if you need to buy early or later are your family health history and gender. Women, particularly single women, will pay much higher premiums due to statistical longer life expectancy than men. As a result, they may wish to get policies a bit later in life.

Those with hereditary health conditions will likely have to face an array of tests before getting coverage, and if you have any active signs of a long term disease, you’ll be denied coverage. Thus with hereditary illness, the sooner you can get coverage, the better.

How to Manage The Cost Of Long Term Care Insurance

Long term care is expensive, with estimates ranging from an annual cost of $43k for private room in an assisted living facility, to $92k for a private room in a nursing home.

This high cost of care is reflected in the price of LTC policies, as annual premiums currently average from $2,100 to $2,700 for married couples.

High premium costs are arguably the main reason why many choose not to buy long term care insurance. However, rather than forgo a policy altogether, it’s important to understand what factors go into the cost of a policy, and how you might be able reduce premiums to a level that’s comfortable for you.

Senior couple dancing on the beach after buying long term care insurance.

Benefit and Waiting Periods

The first major factor in the cost of policy is your benefit period, which is the amount of time for which you are covered by long term care insurance. Benefits typically pay out in form of daily benefit (typically $150), or a monthly benefit (typically $1,500 to $3,000). The longer your benefit period, the more the value of your long term care policy, and the higher your premiums.

Now, historically the “standard” benefit period has been three years. However data shows 67% of Americans end up needing long term care for less than 2 years. In fact, 40% of those in nursing home stays are there for less than 3 months. This means many are overpaying for their insurance, or avoiding a policy altogether because they don’t realize they can pay lower premiums.

On the flipside of the benefit period is your “waiting period”, also known as an “elimination period”. This is equivalent to a deductible, and it is the length of time you will pay out of pocket for care before your policy kicks in. The standard is 90 days. Conversely to benefit periods, the shorter your waiting period (including zero-day waiting) the higher the cost of your policy.

What to set your benefit period as depends on you as an individual. If you have a family history of Parkinson’s or Alzheimer’s, you might opt for a policy of five years or greater (indefinite policies exist), as you anticipate needing a lot of care.

If you feel healthy, and generally have family or resources to help you in times of need, you may want a one year or 3-month policy in case of emergencies. The key is to work with your insurance company to find a balance that’s right for you.

Setting your waiting period is a bit more tricky. On one hand, a large number of people will be in an out of nursing homes before 90 days, virtually making no use of their long term care policy. On the other hand, a zero-day waiting period is on average 40% more expensive that the same policy with a 90 day waiting period.

There’s no clear cut answer outside of comparing how much you project to have saved, and comparing your out of pocket expense for 90 days of care, compared to the difference of additional premiums.

Inflation Protection

Long term care is something you project needing in 20 to 30 years, which means inflation will eat into the initial value of policy. As a result, most policies will include inflation riders, which scale the value of your policy by a fixed percent, to offset the cost of inflation.

While useful, you’re going to pay more for inflation protection, so it’s not necessarily saving you money. The difference is how much inflation protection you choose to have, and this is a bit of a gamble. Some individuals choose no inflation protection, while others choose 5% compounded.

The main thing to determine is how long you anticipate paying for your policy before needing coverage. If you imagine needing the policy in less than 10 years, you might be able to squeak by which less inflation protection, and thus lower premiums. For most policies we say split the difference and get 3% protection.

Outside of inflation, the other thing to consider are rate increases. As care costs rise, most LTC policies reserve the right to increase rates throughout the duration of your policy. This is separate from inflation and you should take note of the parameters of your insurance policy.

Senior couple celebrating the purchase of long term care insurance.

Hybrid Policies: An Emerging Alternative

The fundamental concern with buying long term care insurance is wondering, “Am I going to need this?” If you don’t, you are paying spending a lot of wasted money. It’s probably the main reason many choose to forgo policies.

Life insurance companies saw this problem, and developed a unique solution: hybrid life insurance policies. The concept is a whole life insurance policy, whose cash value can be put toward long term care should the policyholder need it. If not, that money still goes to their beneficiaries in the form of a death benefit. While the premiums for this policy are quite high, they provide a great deal of flexibility and a good risk policy for both death and care costs.

Final Notes

If you’re considering buying a long term care policy, remember a few things. First, does your income prohibit you, or make it financially inefficient for you to get a policy. If so, perhaps you want to self insure. Second, if you are approaching age 60, every year counts and if you are going to get a policy, you should get one ASAP. Finally, when considering your policy’s premiums, you’ll want to know and understand your benefit period, your waiting period, and inflation protection. Compare those to that of a hybrid life insurance policy, and then you will be able to make the decision that’s best for you.

If you have any further questions, check out our resources on whole life insurance and cost of care calculator.

Kamran Rosen
Kamran Rosen is a freelance personal finance writer and expert. He graduated with B.S. in economics from University of Vermont. He was previously a staff writer for both Nerd Wallet and The Hustle.

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