Do You Need Long-Term Care Insurance?
Two major unknowns can determine whether or not you outlive your money in retirement.
The first unknown is the effect market conditions have on your investment portfolio. You can reduce their impact and protect your assets by following a prudent investment strategy. A low-cost, broadly diversified portfolio is recommended for all retirement investors.
The second unknown is the cost of treating future health conditions. A 65-year-old couple that retires in 2014 can expect to pay about $220,000 in medical expenses throughout retirement, according to Fidelity Benefits Consulting.
However, that doesn’t include long-term care. The annual Genworth Cost of Care Survey found the median annual rate for a private room at a nursing home costs nearly $88,000. That risk of additional health expenses is a primary reason many people over the age of 50 consider purchasing a long-term care insurance policy, which covers nursing home and assisted-living services.
Should everyone near retirement buy long-term care insurance? Does it make sense to pay the premiums each year – considering premiums can rise and benefits can be reduced – when you likely won’t need it until later in life? What if you never need it, or your needs are significantly less than the coverage you paid for?
A long-term care policy can be an expensive long-term investment. According to a 2012 AARP study, the average annual premiums for buyers age 55-64 was $2,261 while those 75 and over paid $4,123. In the past two years, long-term care premiums have risen 4.8%, according to the American Association for Long-Term Care Insurance (AALTCI). If you factor in the cost of an inflation rider (or the depreciation of your coverage from not having one), a policy could eat away even more of your retirement income.
Chances are you will have to pay some long-term care costs. The Department of Health and Human Services reported that 70% of Americans who are aged 65 today will need some kind of long-term care services.
For a 60-year-old in good health, the AALTCI estimates the most effective long-term care policy is one with a $150 daily benefit and three-year benefit period at a cost of $164,000. However, the policy doesn’t kick in until after a 90-day waiting period, and the average nursing home stay is 835 days, just over two years.
Therefore, if you have $1 million or more in invested assets, you could reasonably self-insure for that amount and time period. You could even use the equity you have in your home. That may make the most sense for a couple that chooses to downsize as one spouse receives long-term care. Of course, an extended need for long-term care can still significantly diminish large retirement savings.
It’s important to incorporate potential long-term care cost into future retirement expenses. Although unscientific, check your family history for any chronic health problems to help determine the probability you will need long-term care.
If you are considering long-term care insurance, read the fine print so you understand exactly what you’re buying. Keep in mind what you buy and when you buy affects the premium. While premiums are cheaper at a younger age, you may be paying over several years. If you buy when you’re older, the annual premium is less affordable and you may not even qualify, depending on your health. No matter what your premium and coverage are when you buy, they can change at the insurer’s discretion.
An alternative would be to buy an annuity, which could provide a reliable income source specifically for medical expenses. And if you don’t need it, you may still receive the money to put toward other retirement expenses. As another insurance product, be sure to investigate costs and restrictions.
Ultimately, a consistent fitness routine may provide the best chance to maintain your quality of life and manage healthcare costs. An obese person’s medical costs are about 42% higher than a person of normal weight, according to a 2009 study published in the journal Health Affairs. Further, academic research suggests that physically active seniors are less likely to lose their memory or need to go to a nursing home.
Long-term thinking, for your investments and your health, can be the best way to stay financially fit.