May 21, 2009

Is Long-Term Care Insurance A Good Value?

Even though it's possible to significantly reduce the chances you'll eventually need long-term institutionalized care, as discussed in this previous entry, you can't eliminate the possibility. And given the high cost of an extended stay in a nursing facility, doesn't it follow that buying insurance makes sense?

For the poor and affluent the answer is clearly no, albeit for different reasons. But for middle- income people, depending on several factors -- most importantly whether they are single or coupled -- the answer may be yes.

First, let's consider people with low to lower-middle incomes and savings levels. Given that the premium for a care policy with even mid-level benefits can cost over $1,000 annually at age 55, and upwards of $2,000 at 65, people in this group simply can't afford it.

In my view, it's better to spend the money affording a decent life now, relying on Medicaid to cover care costs later should they turn out to be necessary.

The affluent should usually say no to long-term care insurance for a different reason. Given that the majority of seniors will never enter a nursing home and of those who do, only 25% will stay more than a year, simply paying the cost out of pocket is likely to end up being less than 30 years of premiums which, of course,could otherwise be invested.

And even if an affluent person spends two or three years in a nursing facility, it won't be a financial disaster, since Social Security and other income will cover part of the cost, and receipts from the sale of the person's house or condo will easily cover the rest.

But long-term care insurance can make more sense for middle-income Americans with moderate savings, especially single people. The fact of being single is important since it raises the odds of needing long-term care. That's because, with a couple, when the first spouse begins to need help, the other often provides it at home.

And single or married, middle-income Americans with savings in the $200,000 to $400,000 range may want to purchase long-term care insurance for economic reasons. On the one hand, provided you're willing to scrimp a little. And on the other, should one or both members of a couple be unlucky enough to be in the small group who needs institutionalized care for many years, the money will be there to provide it.

In my next post, I'll discuss what kind of policy, assuming you are interested in looking into the purchase of long-term care insurance.