When Should You Get Long Term Care Insurance?

Posted December 20th, 2012 in Insurance by Jeremy Waller

I’ve already talked about why you need LTC insurance. Even if you have a modest amount saved for retirement, you could quickly go bankrupt if you end up in a nursing facility. If you look at the statistics for end of life care, it’s startling.

The average private nursing home room will set you back $74k per year. With most people staying 2 to 3 years, you’ll be out of pocket $200k or more.

Fortunately, there is an insurance product designed to offset this risk. Long term care insurance is just like health insurance except that it pays for extended stays in non-emergency medical facilities. For the same reason that you should carry a catastrophic health policy, you should carry long term care insurance.

When to Buy Long Term Care Insurance

The timing of a LTC policy is tricky though. Buy it too early in life and you’ll be paying premiums needlessly for years. Wait too long and premiums will be astronomical at best or you health may preclude you from getting insurance at all at worse.

Most financial experts say you should start considering policies in your mid 50s and should definitely have a policy in place by your 60th birthday.

Before age 60, you have less than a 1% chance of ending up in a nursing home. After this point, you have two things working against you. Premiums rise exponentially as you move past 60. If you wait too long, it probably won’t even make financial sense to get insurance. The other problem is that the chances of contracting serious illness increase significantly as you age, preventing you from even qualifying for LTC insurance.

Evaluating Cost vs. Benefit

The cost of the insurance policy varies greatly depending on when you purchased it. In you mid-fifties, you’ll probably get quotes around the $150 range. Once you hit 60, premiums will run $200 to $250 per month.

Rounding up, let’s say you’re paying $3,000 per year in premiums. Scenario A – you pay yourself $3,000 per year and invest it. Scenario B – you pay $3,000 per year for LTC insurance.

In each scenario we’ll assume you buy coverage at age 60. You then live to the age of 78.2, the average life expectancy in the US. We’ll also assume that you spend the last 2 years of your life in a nursing facility.

Scenario A – Invest It

Just doing a back of the envelope calculation, $3,000 invested annually at 8% for 16 years nets you $119k. That’s enough to say in an average nursing home for 1.5 years, nearly a year less than the average stay. In order for this to work, you would need to live longer than average, stay in a cheaper facility or have your overall stay be less than 1.5 years.

Scenario B – LTC Insurance

This option is pretty straightforward. You pay $3,000 per month and don’t have to worry about needing enough money to cover the cost of a stay in the nursing home.

There are a couple of things to consider here. You come out ahead in scenario A if you live longer than average. You also come out ahead never need nursing care or only need it for a short period of time. At your death, the remaining funds can be passed on to your heirs.

The only problem here is that you are playing the odds. Yes, there’s a chance that you could leave more to your heirs, but there’s also a chance that you could spend the last few years of your life penniless.

Quality of life is a big factor for me personally. I would prefer taking the chance that I would never use the LTC insurance and have the piece of mind that any nursing care I would need is covered.

Have you considered long term care insurance as part of your retirement planning?


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6 Responses so far.

  1. I don’t think there’s ever the perfect time to be honest.

  2. Andrew Pohl says:

    When I was an insurance agent I found that the pivotal year for premiums was at age 40. Before age 40 premiums remained the same but after age 40 they began to ramp up. Unfortunately I cannot remember the increase every year but I remember thinking that because of that structure there was no reason to get LTC insurance before age 40.

  3. I did not consider long term care insurance as part of my retirement planning. I still I am confused about it. Your post is helpful to clear some confusion. Thanks for the good post.

  4. Great post! I am confused about long term care insurance. My dad is suggesting me to start planning for it from now on. Your post gave me some idea. Thanks for sharing this with us.

  5. I’m journeying with a friend who just found out firsthand the need for long term care insurance. He just recently had a stroke and depending on his recovery may not be able to work again. I hope of course that he can, but in the meantime I wish he would have gotten some LTC insurance. Thanks for this post, it can’t help my friend but hopefully it will help countless others who need to get it.

  6. I’m using this post as ammunition as I talk with my parents about the importance of LTC insurance. They are both in their late 60’s but haven’t yet considered how important this coverage is going to be. When you look at the scenario you propose, buying LTC insurance definitely wins out. Thanks for helping me have a difficult conversation.

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