How Can You Afford Long-Term Care Insurance?

Although the policy premium for a long-term care insurance contract is not supposed to increase, the insurance company has the right to increase rates on a whole group of policies at once. But most companies have never raised rates on policies in force. The industry has taken steps to ensure proper pricing on new policies to avoid surprises later. That is another reason premiums are not cheap.

How much you can afford for long-term care (LTC) insurance should be part of your financial planning. There are so many factors involved in premium-setting that most people will need personalized premium quotes to decide which policies and policy benefits are best suited to their needs.

Get started by preparing a lifetime forecast of income, expenses, and accumulated net worth to help estimate how much you are likely to have available for long-term care needs. Use your family history, current health, knowledge of advances in medical science, and healthcare costs to estimate how much money you might need for long-term care costs and when you are likely to need it. Now determine how much benefit you will need from a long-term care insurance policy to make up the difference between what you estimate you will have available for long-term care and what you will need. A financial planner or long-term care insurance specialist will be happy to help you with this process.

When you have estimated how much you will need in the future, you can build a policy designed to meet your needs. Once you have decided you are going to buy a long-term care insurance policy, it is important that you be able to maintain the premium payments as long as you need the insurance. If your ability to make premium payments is in doubt, an LTC policy is probably not for you. Today's premium dollars would be better invested elsewhere—building an emergency fund, for example.

Buy Now or Wait?

Even if there is little question about affording the premiums or the need for coverage, some LTC insurance shoppers question whether they should buy just yet. They realize that buying an LTC policy while younger and healthier means a much lower premium, but they could be paying for many years before a claim is likely. Alternatively, if they wait to buy, the premium money can be invested instead, but the cost will be much higher in later years, and in the meantime, their health might change, making them uninsurable. You cannot buy long-term care insurance once you need its benefits.

The bottom line is that there is a good chance of incurring long-term care costs in some form at some time; and the probability of incurring the expenses increases as you age. That is precisely why LTC insurance costs less when the purchaser is young: so the company is likely to collect premiums for many years to build up reserves to meet the benefit payments.

So if you are going to buy LTC insurance at all, an open-ended delay in doing so probably is not the best choice. There is a significant chance that you will be unable to qualify later, not to mention that you might even need LTC sooner than expected. We all hope to maintain good health and independence well into old age, of course. But uncertainty in life is the reason insurance exists to begin with.

A Sensible Approach to Paying for LTC

While most of us could not set aside a self-insurance fund today adequate to pay out of pocket for several years of LTC costs, there is a realistic alternative for many—create a dedicated source of long-term care premium payments.

Establish an account with the sole purpose of generating enough interest or dividend income each year to pay the LTC premium. Much less money is needed to do this at an early age when premiums are relatively low, of course.

During this period (before about age 55 or so), an investment of manageable size would be sufficient for many people, even in a low interest rate environment. The fund must be dedicated to premium payments, however. The earmarking is essential to ensure you can keep the policy in force throughout a (hopefully) long life.

For example, $50,000 earning just 3% yields $1,500 annually. That would probably pay all or most of the premium for two or three years of good coverage for a healthy 40- to 50-year-old. Middle-aged folks without this level of assets available already could, of course, try to accumulate it through a concerted savings plan over the next few years.

Someone who waited till age 60 or 65 would have to dedicate a much larger sum to yield enough to pay his premium. But even a reserve of $150,000–$250,000 could be attainable for many people at that point in life. After all, the investment does not have to be new money.

Consulting with a financial planner is a good idea for exploring ways to "finance" a long-term care premium. There are many possibilities, and the one that works best for you might not work for someone else. Consult a financial advisor before going forward with any re-allocation of assets.

LTC insurance has gotten a lot better over the past few years. It has taken its place among the other financial planning tools for retirement and estate planning.

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