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The factors in buying long-term care insurance

1. Your net worth

There are no hard-and-fast rules saying that if your net worth is above or below a certain level you should or should not consider buying long-term care (LTC) insurance. Over the years I’ve seen these as rules of thumb:

  • If your net worth is less than $500,000, then forgo LTC insurance, as you will likely qualify for Medicaid or some other sort of assistance.
  • If your net worth is over $2 million, the conventional wisdom is to self-insure your long-term care needs.

So this then leaves the folks with assets between $500,000 and $2 million as the key market for LTC insurance.

Rules of thumb are just guidelines at best, and there are other factors to be considered.

2. Spouse's financial security

A key reason that many people purchase long-term care insurance is to provide financial security for a spouse in the event that they find themselves in need of long-term care. The costs mentioned above are significant and can leave your spouse in financial straits if you are not prepared financially. Long-term care insurance can be one way to mitigate the impact on your spouse.

3. Wanting to leave an inheritance

Another consideration as to whether or not to purchase LTC insurance is leaving an inheritance to your heirs. This might be a spouse, children, other relatives or perhaps a charity.

Long-term care insurance is a means to mitigate the costs of your care needs and preserve your wealth for the next generation.

4. Getting the care you need

A consideration in determining whether LTC insurance is the right solution for your needs is whether or not you would seek the proper care and support that you need if you had to pay these costs out-of-pocket.

It’s easy to say that you will self-insure against these costs or that a spouse, a child or another friend or relative will provide the care that you need. The reality of actually writing the check is another matter; this type of care is expensive.

Putting a loved one in the position of being your caregiver is tough as well. They may or may not be qualified to do this. You are also asking them to put their life on hold. Even if they are willing and able, this is a big responsibility for anyone to assume.

5. The cost of long-term care in your area

As mentioned at the outset, long-term care costs vary widely by the region of the country, whether you are in an urban or more rural area and other factors. Do some research to determine what these costs are in your area. If you think you might relocate in retirement, research the location that you are considering moving to.

Other considerations for LTC insurance

  • Employer coverage: If your employer offers LTC coverage it might be worth checking out, as the coverage is often portable and available at group rates.
  • Fixed premiums: A couple of years ago a major provider of LTC coverage got approval for some onerous rate hikes here in Illinois. This could become more common in the future because insurers did not count on people living as long as they are. Also, the insurers have far less actuarial data on LTC than on, say, life insurance.
  • Hybrid policies: Look at hybrid policies such as life insurance with a long-term care rider. As with any insurance coverage, become educated and beware of being sold something that is overpriced and not a good fit for your needs.
  • Get the correct coverage: Long-term care policies cover various terms from two years to lifetime coverage. What term of coverage is right for you will depend upon a number of factors. Remember that LTC coverage is like any type of insurance in that you are looking to pass on some or all of the risk to the insurer and self-insure the rest. Based on your assets and the other factors listed above, determine how much of the risk you are comfortable assuming yourself and how much you want to pass on to the insurance company.
  • What riders are available: Long-term care insurance policies come with any number of optional features, called “riders.” Think of this like buying a car. Do you want a sunroof, a premium sound system or alloy rims? All of these are options and will cost extra compared to just buying the base model. Likewise with LTC riders. A very common, and in my opinion a useful rider, is inflation protection.
  • Age matters when buying: Long-term care insurance will be cheaper the younger and the healthier you are. This needs to be weighed against the cost of having to pay the premiums for a number of extra years.

Summary

As a Baby Boomer I can tell you that getting old has its drawbacks. The prospect of needing long-term care during my lifetime is not a plus. We all need to figure out how we will fund this need should it occur. Long-term care insurance is one vehicle, but like most financial products it needs to be understood before you can make an intelligent decision for your unique situation.

Roger Wohlner Freelance Contributor

Roger Wohlner is an experienced financial advisor, finance blogger and freelance writer based in Arlington Heights, Ill. His expertise includes providing financial planning and investment advice to individual clients, 401(k) plan sponsors, foundations and endowments.

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