This article was originally published on May 6, 2015 and was updated on April 8, 2018.
Long term care insurance is designed to help you cover the costs of a nursing home or other skilled care as you age. As with most insurance policies, you must consider purchasing it before you need it, as policies become either unavailable or prohibitively expensive once it becomes clear that you need the protection.
Long term care insurance generally provides financial help for those who need specialized care on a daily basis. And with rare exceptions, once you start needing nursing-home care beyond a rehabilitation stint that Medicare or your health insurance will likely cover, there's a good chance you'll need that care for the rest of your life.
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The opportunity this combination creates
If your health forces you to make a permanent move to a nursing home, the rest of your major assets (like your house, car, or even any savings you may have) become far less useful to you. So if you're living alone or if your spouse also needs care, then these assets can be sold to help cover the costs of the care.
Once your assets become nearly completely depleted, Medicaid will step in to cover your remaining long term care costs. Not all nursing home facilities accept Medicaid, however, so you should make sure that yours does if you may need the help of Medicaid.
Additionally, if you're married and only one spouse needs nursing-home care, then Medicaid provides some protections for the remaining spouse. It generally allows the spouse who doesn't need care to keep a reasonable place to live and enough assets and income not to force that remaining spouse into abject poverty. Once both you and your spouse pass away, your state may have a Medicaid-related claim against your estate, but that would be an issue for your heirs.
Put those factors together, and the net result is that long term care insurance generally isn't needed to protect you or your spouse from abject poverty should the need for nursing-home care arise. It can be a useful tool to protect some of your estate for your heirs if leaving an inheritance is important to you.
To insure or not to insure? That is the question
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Ultimately, if you're contemplating long term care insurance, you're considering whether to trade a certain cost today (the insurance premium) for the potential cost down the road (the care itself). Many people start to shop for long term care insurance in their 50s, at which point long term care insurance can cost thousands of dollars per year.
Premiums can vary based on your age, health, and the insurance company's specific underwriting factors. Your premium will also depend on your personal choices, like the maximum daily benefit level, the length of stay your policy would cover, and any waiting periods before the coverage starts.
According to Genworth's (NYSE: GNW) long term care insurance cost estimator, if a typical 60 year-old couple bought coverage that would cover $365,000 apiece worth of lifetime benefits, their premium cost would be around $2,758 each per year ($5,516 per year for the couple). For an individual 55-year-old looking for similar coverage, the price tag would range between $2,760 and $4,057 per year.
Unfortunately, costs for individual plans can vary wildly and are hard to come by without speaking to an insurance salesperson. There's a free premium calculator tool available for federal government employees who qualify for their group plan at this link. While pricing in that group plan will be different from the costs you will face, it can at least provide a ballpark estimate as you shop for your own long term care insurance.
Unless you reasonably expect to work until you pass away or become incapacitated, you'll have to keep paying those premiums throughout your retirement to keep the insurance in force. In other words, you'll need enough spare income in your retirement to pay the premiums, which would require a decent asset base, a strong pension, and/or a very low cost of living.
Indeed, given that long term care insurance primarily protects your estate from Medicaid seizures, it typically only makes sense to carry that insurance if you have a decently positive net worth.
At the upper end of the net worth scale, if you have sufficient net worth, you can self-insure by setting aside a pool of money to cover the cost of any long term care you may need in the future. You see, according to Genworth, the average annual cost of a nursing home room is around $85,776 per year for a semi-private room or $97,452 for a private room. And according to the American Association for Long Term Care Insurance, only about 12% of people stay in nursing homes for more than five years. Further, a typical stay is generally shorter if you're married than if you're not, likely reflecting the fact that one member of a couple often functions as a caregiver for the other as they age, delaying the need to move to the nursing home.
So, given that an ordinary couple is unlikely to spend more than about $1 million on long term care ($100,000 per year x 2 people x 5 years per person), insurance looks less worthwhile if your net worth is beyond $2 million, especially if you're a decent investor.
It's your choice
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You may want to consider buying long term care insurance if all three of these apply to you:
- You want to leave an estate to your heirs;
- You have enough retirement income to reliably cover both your expected retirement lifestyle and the long term care insurance premiums; and
- Don't have enough in assets to reasonably self-insure against the risk
Otherwise, chances are good that you can find better uses for your money than buying that particular insurance.
