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When Does Long-Term Care Insurance Make Sense?

Have you checked the cost of elder care options lately? A typical facility now costs more than $7,000 per month for a semi-private room, while the cost of an average room in an assisted living facility is around $3,800 per month. Funding these options can consume hundreds of thousands of dollars, putting them out of reach for those that failed to plan ahead with a proper financial plan.

That makes the appeal of long-term care insurance (LTC) self-evident. But these days, LTC is causing a lot of headaches. Insurers underpriced these plans, which in some cases, led to whopping premium increases. In response, many people simply dropped their policies, or completely avoid them in the first place. And that could be a big mistake. (Note that not all LTC policies allow for premium increases).

Instead, it’s wise to dig deeply into the various LTC insurance policy options at hand. Figuring out what LTC will cost you now, and what it will do for you down the road is an important piece of financial planning analysis. Just as important, the era of unexpected premium increases appears to have ended, as insurers have addressed mistakes in their past pricing assumptions.

Tempted to self-insure against this potential cost burden? Many people plan to “age in place,” spending their final years at home rather than in a facility. But home health care can also become quite expensive, especially as the rising surge of seniors starts to outpace the available supply of home health aides.

Of course, government programs can replace LTC insurance. But Medicare – the health insurance program for the elderly – provides only limited coverage for 100 days, while Medicaid only covers the long-term care costs of the indigent.

The Center for Retirement Research has produced an important, if wonky, primer on the topic (which you can read about here http://crr.bc.edu/briefs/long-term-care-how-big-a-risk/ and download the “full brief”).

If you are considering the purchase of long-term care insurance, it's best to do it while you are in your 50's or 60's. If you purchase a policy after age 70, then the premiums are bound to be too high to justify. And even though it may seem to make sense to buy a policy in your 60's rather than your 50's, know that the earlier you buy a policy, the premiums will be far lower, leading to the lowest total lifetime cost of premiums paid. 

Your choice comes down to your personal financial picture, your risk tolerance, and your family’s health history (including areas such as dementia). A holistic discussion around those topics can help you determine if LTC insurance is right for you.