Should you buy long-term care insurance?

This article was posted on July 1, 2005.

Many early retirees fear losing their hard won nestegg to the cost of a nursing home if either they or their spouse becomes disabled. Long-term care (LTC) insurance is one way to protect against this risk, but it's a complicated product to analyze and expensive to buy. It also tends to be a high-commission item that does more for the insurance agent who sells LTC policies than the customers who buy them.

What's the chance you'll need long-term care?

If you talk to an insurance agent, you might get a feeling that everyone will eventually fall victim to a long, expensive stay in a nursing home. However, a review of the actual statistics reveals a much smaller chance that you'll see an extended stay in a LTC facility.

Who should consider LTC insurance?

If your net worth is below $300,000, you're probably not wealthy enough to afford it. If you're a millionaire, it may make more financial sense to pay for your long term care yourself and forgo the insurance.

What are the risks of not buying LTC insurance?

Obviously, the biggest risk is that a long stay in a nursing home would impoverish you (and your spouse.) However, as the table above shows, the risk of a long stay in a nursing isn't as high as some LTC salesman would lead you to believe.

What are the risks of buying LTC insurance?

Long term care insurance is very expensive, and you'll have to keep paying a likely ever increasing premium until you enter a nursing home or die, whichever comes first. So the biggest risk is that you'll need sufficient funds to make these payments for an extended period of time.

Another risk is that insurance companies have a very specific set of criteria that they use to decide when you qualify for long term care. (See activities of daily living.) You may well decide that you're ready for an assisted living facility long before the insurance company agrees you qualify for it. Forgoing the LTC insurance and putting the money otherwise lost to premiums in an investment account gives you much more flexibility in choosing the timing of your care in that instance.

To learn more about LTC insurance, see this excellent series of six articles on the subject by Dave Braze at the Motley Fool web site.

http://www.fool.com/retirement/care/01.htm

There's also an interesting article on the subject in the September 2004 issue of the Journal of Financial Planning.

http://www.fpanet.org/journal/articles/2004_Issues/jfp0904-art8.cfm