Considering Long-Term Care Insurance

long term care insurance

I grow old… I grow old…
I shall wear the bottoms of my trousers rolled.

If you’re of a certain age, besides re-reading The Lovesong of J Alfred Prufrock, you may have considered long-term care insurance. Should you purchase it?

1. What is it?

Long-term care insurance provides reimbursement for expenses associated with nursing, assisted living, or in-home care. To qualify for benefits, you typically must be unable to perform two or more “activities of daily living.” These are:  dressing, eating, walking, toileting, hygiene, and bathing.

Essentially, it is a combination of a forced savings plan and catastrophic coverage. In most situations, you’ll pay premiums for many years before receiving any coverage.

2. How is the premium determined?

The pricing is complex and based on the interplay of several factors. The primary considerations are:

  • Age — when you begin paying premiums
  • Medical assessment — how good is your physical and mental health
  • Benefit maximums — a combination of the allowable number of days, coverage per day, and/or total lifetime coverage
  • Waiting period — how long you wait to receive benefits, once you have qualified for them (typically 1 to 6 months)
  • Inflation adjustment — how much benefits may increase each year for inflation

These are difficult trade-offs. As you may expect, the more protection you purchase, the greater the premium you pay, so you shouldn’t buy more than you need.

3. Is there an optimal age at which to purchase it?

As with any insurance, the day before you need it is usually the best time but that’s a risky strategy.

There’s no precise answer, but you’ll want to apply for it while you’re healthy as the premiums will be higher if your health declines. Or, you may become uninsurable.

4. What else should you consider?

First, you’re making a lifelong commitment to pay the premiums. Second, you’re making a lifelong commitment to the insurance company you choose. From those two points, keep these in mind:

  • Don’t start if you don’t plan to continue indefinitely.
  • The premiums may increase in the future — while it is not easy for the insurance company to raise your premiums each year, you have no guarantee of this.
  • The insurance company may not always offer the coverage — they’re unlikely to drop coverage but you have little protection if they do.
  • The insurance company may not remain solvent — insurance companies rarely go bankrupt but if one were to do so, it is likely that state guaranty pools would provide some coverage but you have no assurance that is equivalent to FDIC protection of bank accounts.

These considerations make it a difficult decision as you’re taking risks whether or not you insure.

5. What should you do?

If nothing else, it forces you to have a conversation about your mortality but who wants to do that?

  • If you’re young, you’ve probably already stopped reading this note but if not, you shouldn’t consider this for many years.
  • If you’re wealthy, you can afford to self-insure against this risk and that’s probably a better option.
  • If you’re low-income and have little savings, you cannot afford a lifetime commitment to pay these premiums so you should go without and recognize that if you need these services, you’ll probably require Medicaid.

The decision is hardest for people who fall into the category of having savings but not enough to cover a long period of care. You’re faced with either a financial commitment to pay these premiums for many years, or the risk that you may need care for an extended period of time and drain your savings. There is no single correct answer for everyone.

If you choose to move forward, use a reputable agent who is experienced with long-term care insurance specifically. Ask for multiple quotes and carefully compare them. Also, pay close attention to your choice of both the insurance company and the level of benefits as it may not be easy to change either at a later date.

Update: The New York Times writes about insurance companies substantially increasing the premiums they charge.

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