Long-Term Care Insurance: Should You Buy It? And If So, When?

In the last few days, I’ve gotten a couple emails asking for my thoughts on long-term care insurance, specifically:

• Is it a good idea to buy it?
• If it is a good idea, are there people who should not buy it?
• If you should buy it, when is the best time to buy it?

According to the U.S. Department of Health and Human Services:

“At least 70 percent of people over age 65 will require some long-term care services at some point in their lives.  And, contrary to what many people believe, Medicare and private health insurance programs do not pay for the majority of long-term care services that most people need.”

That information, combined with the expensive cost of long-term care, leads me to think that long-term care insurance is a good idea for many people.

But it’s not for everyone. There are (at least) two scenarios in which it makes sense not to buy LTC insurance:

1. You can’t afford it. It’s not exactly cheap, and it should be a much lower priority than saving for retirement.
2. You can afford to self-insure. That is, you expect to have a large enough portfolio to be able to cover the cost of long-term care while using a sustainable withdrawal rate (usually considered to be 4% per year or less) for the rest of your expenses.

In other words, LTC insurance makes most sense for people whose savings are in the “able to afford it, but not able to afford long-term care without it” range.

So How Much Does Long-Term Care Cost?

It depends who you ask.

Insurance companies are fond of quoting the eye-popping average cost of a stay in a nursing home: $219 per day for a private room.

But much of what qualifies as long-term care services (and, therefore, much of what makes up that “70% chance of needing long-term care” figure quoted above) is less expensive than a stay in a nursing home.

For instance, one study on the topic estimated that, of people who turned 65 in 2005, 94% would end up with out-of-pocket long-term care costs below $100,000 during their lifetime, and 82% would have out-of-pocket long-term care costs below $25,000 during their lifetime. (Important caveat: These are 2005 costs, and things have gotten more expensive in the last 6 years.)

In short: You probably won’t have to pay an astronomical sum of money for long-term care during your life. But the possibility is there, and I would argue that it’s worth planning for.

When Should You Buy Long-Term Care Insurance?

The majority of long-term care needs arise after age 65, but the longer you wait, the greater your premiums, and the greater your chance of being denied coverage. As a result, most of the analyses I’ve seen indicate that the best time to buy long-term care insurance is usually sometime between age 50 and 60.

It seems to me that a big part of this decision comes down to the likelihood of needing long-term care prior to age 65. Unfortunately, I’ve tried several times to find such information, and I haven’t had much success. (If any readers have that information, please pass it along!)

Also, to some extent, it’s simply a question of personal preference. The more risk-averse you are, the more sense it makes to insure earlier rather than later.

Shopping for Long-Term Care Insurance

Finally, it’s important to understand that all long-term care policies are not created equal. If you’re not careful, it’s entirely possible to buy a policy, only to find out that it doesn’t pay a dime toward the type of care you were hoping to receive.

For a few tips on what to look for in a long-term care insurance policy, I’ll direct you to two of my favorite resources:

• Consumer Reports, and
• MoneyWatch blogger Steve Vernon.