Figuring out what to do in regards to your long term care is a really important decision, and I want to make sure that you get it right. While I don’t think it’s always necessary to buy a long term care insurance policy, I do think it’s essential to have a long term care plan.
As you analyze your options, consider (at least) these 5 questions:
1. Do I really need long term care insurance?
2. When should you buy long-term care insurance?
3. Can I get a policy with my spouse?
4. Will long term care rates increase?
5. Do I need inflation protection on my policy?
1. Do I really need long term care insurance?
Purchasing a Long Term Care policy is completely optional and is not required by any state or the federal government.
Everyone needs a long term care plan, but not everyone needs a long term care insurance policy.
The question, in my mind, really comes down to your comfort level and your desires of what you would want to happen if you ever needed the care. Since I can’t answer that for you in this blog, here are a few questions to ask yourself, your spouse, and your family:
- Do you have enough assets that you’d be willing to spend tens or even hundreds of thousands of dollars (out of pocket) on long-term care?
- Even if you do have millions saved up, would you be comfortable spending it on long-term care? Or would you rather share the risk with an insurance company?
- Would anyone in your family, or circle of friends, be willing to provide care for you?
- Does your family have any hereditary health conditions that might affect you?
- If you don’t purchase long-term care, and deplete your assets paying for it out of pocket, would you be comfortable using Medicaid (a government program) to provide the long-term care you need?
- Do you have the ability to pay for the insurance policy premiums, either as a lump sum or ongoing payments?
How you answer these questions will determine whether buying long-term care insurance is right for you.
According to a survey by Forbes, people buy long term care insurance for a number of reasons. About two-thirds of people who buy Long term care insurance either to avoid dependence on others (69%), protect their assets (67%), make LTC services affordable (66%), or preserve their living standards (59%).
For folks 65+, it is estimated that about 66% or even more are eventually going to need some form of long term care. But what’s more important about people to know is that more than half of those looking for these services will need it for less than 3 months. And guess what? A typical “elimination period” on these policies is often 90 days, which means many people who need long term care can’t even get their insurance to pay for it before they are healthy again.
In addition, the average time in long-term care is between one and one and a half years, longer for women and shorter for men. So that’s a decent amount of time, but depending on your health, it may not be too much out of pocket.
So yes you will likely need it, but will you necessarily be able to use the full benefits of your long term care insurance policy? That’s a tougher question to answer.
2. When should you buy long-term care insurance?
The American Association for Long Term Care Insurance suggests buying a policy around your mid-50s. I think that is a good starting point, but I think you can also consider it closer to age 60 as well.
Even if you don’t need the benefits until you’re 70 or 80+, if you delay too long your health may diminish and you won’t be qualified to get the policy.
Furthermore, premiums are related to one’s age. As a result, the longer you wait, the higher your premiums will be. The annual premium for someone in their 50s falls by 2 to 4% each year and for someone in their 60s, it increases by 6 to 8% each year. So it’s a balancing act. If you sign up early you can end up paying for insurance for years before you need the care.
3. Can I get a policy with my spouse?
Yes, you can. You can get something called a shared-benefit rider with your spouse, as a way to hedge your bets when choosing your benefit period. Instead of two separate benefit periods, a couple has a pool of long-term-care benefits to split.
For example, rather than having three years for each spouse, you may have a total of six years of coverage that either one of you can use. If your spouse needs care for two years, you’ll still have four years of coverage. Adding a shared-benefit rider to a LTC policy generally costs more than buying two separate benefit periods. However, since you will have pooled benefits, you may want to consider not having as long of a benefit period, since you will have flexibility in terms of how many years you can use it, as opposed to a single policy where you are locked into a set number of years.
4. Will long term care rates increase?
Obviously I don’t have a crystal ball, but if you have a traditional policy where you pay an ongoing payment every month or every year, then yes, your policy premium is likely to rise. People are simply living longer, utilizing health care and long term care services at high rates, and interest rates are low, which hurts these insurers as they have bond portfolios that they need to generate higher returns. So that combination means that it’s likely that if you purchase a policy today, you can expect the premium to rise in the future.
If this does happen to you, your insurer will usually offer you a few options in response: You could reduce the daily benefit that you receive, you could reduce the inflation protection in your policy, shorten your benefit period, cancel any additional riders you have, or lengthen your elimination period. That is a pretty big decision, and I would encourage you to go through it with either an insurance specialist or a financial planner so you can have an independent perspective to weigh your options.
5. Do I need inflation protection on my policy?
As we know, the costs of goods and services increase every year due to inflation, and the same principle applies to your long term care needs. Let’s say you buy a policy that will cover you for up to $300,000 in today’s dollars, in 2021. Well, in 25 years, assuming a 2.5% inflation rate, $300,000 in 2021 is going to buy you as much as $556,183.23 in 2046. In other words, in 2046 you’ll need $556K to purchase what $300K can purchase you today in 2021.
So if you only have $300K in policy benefits, and that amount stays flat for 25 years, then you could be in serious trouble. Going back to the math, $300K in 2046 will be equal to around $161K today, assuming a 2.5% inflation rate. So it’s still a chunk of money, but it’s basically half of the amount that you originally purchased. So yes, I’d strongly encourage you to look into an inflation protection plan on your policy.
Wrapping It Up
Okay, that’s all we’ve got for today, I hope this helped you answer 5 common long term care questions that I hear often and could be useful to you. If you’d like to learn more about retiring comfortably, go download (for free) my books on retirement at freeretirementbooks.com.