Should I buy Long Term Care Insurance
On the question of whether to buy long-term care insurance, the challenge is that there is no clear-cut answer. If you seek out the advice of an insurance agent, the agent will often speak to the features and benefits of the policies being sold as well as have a clear bias that every person should own an insurance policy for long-term care. The state insurance departments have jumped on the band-wagon by promoting the concept of asset protection to play on the emotion of fear of becoming financially destitute due to the cost of custodial care.
Before ever considering the purchase of a long-term care policy, there is a question that you should first ask yourself. Do you have the conviction that there is a high probability of you spending the last few remaining years of your life confined to a custodial care facility due to some form of chronic illness?
In addition, what emotion are you solving for? Fear of being a burden to your children? Fear of leaving your spouse destitute? Fear of uncertainty about being provided for in the final years of your life? Emotional security of knowing you can pay your own way, thus having the option of choice?
The reason that I begin with these questions is because the cost for an adequate long-term care policy requires a strong financial commitment. Let’s compare the financial commitment for long-term care to financing a car purchase. With a car, there is a stated end date to the monthly car payments. But like most insurance policies, a long-term care policy will lapse if premiums are not paid. And if the policy lapses, all premiums paid into the policy are gone forever. If you choose to purchase long-term care insurance, you need to be prepared to pay the premiums for life.
The second most important question to ask yourself is if you will be able to pay the premiums for life of a long-term care insurance policy without sacrificing the basic-necessities of life, such as out of pocket healthcare expenses, food, housing, housing maintenance and transportation expenses. A clear understanding is needed about both the future demands that may be placed on your household expenses, like inflation, as well as the sustainability of future income sources. As they say in building construction, measure twice and cut once.
Once you have confirmed your commitment to stay engaged on this subject, a prudent approach would be to calculate the net present value of a future stream of payments. Simply put, how much money would I need to deposit today into an account that earns a 5% APR in order to cover the annual payments of a long care term policy (LTC) for the next thirty years?
For example, Jim and Sara are both sixty years old and expect to live another thirty years. The annual cost for their preferred long-term care policy of choice is $6,000 per year. This would require a one-time deposit of $92,235 that earns an assumed nominal annual rate of return of 5% in order to cover the annual long term-care premium payments for the next thirty years. Next, Jim and Sara need to determine if $92,235 in capital is available. And if available, are they willing to commit $92,235 to cover the cost of their proposed LTC insurance for the next thirty years. This approach also helps to determine whether it makes more sense to self-fund or transfer the risk. Let me explain.
If Jim and Sara, simply leave their $92,235 in an account to grow for the next thirty years at an assumed net after tax rate of 4%, the account would grow to an estimated value of $299,154. Today, the average cost of a semi-private room in a custodial care facility is $225 a day. If increased for inflation by 4.5% per year for the next thirty years, the cost of a semi-private room would increase from $225 to $842 a day. Next, do the math. $299,154 / $842 calculates to approximately 355 days of nursing home care, slightly less than a year of coverage for two people.
If the policy being considered both provides a daily benefit that is reasonably adjusted for inflation and exceeds the expected number of days of required coverage in a care facility, then perhaps it may make sense to transfer the risk and purchase a long-term care policy. Of course, the need for a LTC policy assumes that both Jim and Sara end up with chronic illnesses and require the services of a licensed custodial care facility.
