Anyone who has ever looked into long term care (LTC) insurance knows it is not cheap. Depending on your age and the policy you choose, this coverage can cost thousands of dollars per year. If you are retiring and want to make sure your nest egg lasts, you may be wondering if the coverage is really worth the price. While there is no easy answer, generally, LTC insurance makes sense if you wish to accomplish any one of these three things: protect your assets, protect the lifestyle of a spouse, or ensure choice in your care.
Many of the retirees we see today intend to spend their money and enjoy their retirement. If something is left over for their children, that will be fine, but leaving an inheritance is not necessary. However, if the happy and active retirement life you are anticipating is interrupted by a long-term illness, the question becomes: would you rather the assets you worked hard to accumulate go to your family or get consumed paying for medical care? Faced with that choice, many people opt to protect their assets with LTC insurance. Some simple calculations can help illustrate the situation.
Suppose you purchased LTC insurance at age 55. For 20 years, you paid about $1,800 per year for this coverage. If you had invested that money instead and earned 6%, you would have accumulated about $70,000. At age 75, you began needing long-term care and the need lasted three years (the average length of stay at a long-term care facility). The total cost of care was about $217,000 ($180 per day or $65,700 per year, increasing at 5% per year). So, purchasing long-term care insurance protected $147,000 of your assets ($217,000 � $70,000).
Protecting a Spouse
Even if you are not concerned about spending your money on long-term care, you will need to consider the impact paying for such care could have on your spouse. If we use the example above but increase your stay to six years and assume you have no insurance, the cost of your care would be over $469,000. Depleting that amount of your retirement assets over such a short period of a time would likely cause financial hardship for your spouse. He or she would likely have to greatly reduce his or her lifestyle or face the possibly of running out of assets. By purchasing long-term care insurance, you might increase the security of your spouse�s retirement.
If you are single and not concerned about spending your money on long-term care, there may still be one other reason to consider long-term care insurance�ensuring choice and quality of care.
If the need for care arises, will you be able to afford the care of your choice? If someone else is making healthcare decisions for you, will they choose the same facility you would? Having long-term care insurance can make those decisions much easier. In addition, many people assume they will just spend down their assets and then qualify for Medicaid. However, Medicaid may not pay for the same care you expect.
For example, Medicaid typically pays for a semi-private room in a nursing home. You may not be able to receive care at home or in an assisted living facility. Long-term care insurance can help ensure you have those options.
The primary purpose of all insurance is to reduce financial risks. By definition, a risk is something that is unpredictable and cannot be fully controlled. Thus, the decision to buy long-term care insurance should not be based on whether you think you will need it. You buy it precisely because you cannot know if you will need it.
The way to determine if you should buy long-term care insurance is to evaluate the financial impact not having it would have on you and your family. If the impact on your assets, your spouse, or your choice of care is one that you can and are willing to absorb, then you do not need to purchase long-term care insurance.
If the financial impact would be too great on any of these aspects of your life, then long-term care insurance may be worth the price.