Is long-term care insurance worth the cost?

Hello Pete,

What are your thoughts on long-term care insurance? My husband is 60, I'm a month shy of 59. We have not retired yet, but we plan to in the next 3-5 years. We are not destitute, but we aren't Bill Gates either. We would like to leave an inheritance to our two kids, we'd like to fund college costs for any future grandkids, and enjoy our golden years. It seems we already spend a great deal on insurance: auto, homeowners, medical, dental, etc. Without a crystal ball to know our projected health and lifespans, is long-term care insurance something we should consider?

Thanks,

Dorothy

I'm generally a supporter of long-term care insurance. I've written and talked about it several times here on the blog, but today I want to talk through some of the not-so appealing long-term care insurance possibilities.

Dorothy and her husband have goals for their retirement funds. Not only do they want to be able to live off their assets, but they also want to leave inheritances for their children and college savings for their grandchildren. In my experience, most people over-estimate what their retirement assets will be able to do for them, but I can't say for sure that's the case for Dorothy. What I do know is long-term care insurance is decently expensive and may or may not benefit the policy holder.

Not knowing the specifics of Dorothy and her husband's health status I looked up a basic long-term care insurance quote so we could get some figures going. Let's assume it will cost them $4,000 a year to get assisted living coverage for up to $200 a day after a 90 day elimination period (we'll get to the definition of an elimination period here in a moment).

Let's run through a few scenarios with this information.

1. Dorothy and her husband remain healthy and only need assisted living care at the age of 90+. 30 years into their policy they will have spent upwards of $120,000 to protect some of their assets for their assisted living stay. To determine if the policy is worth the cost, it's a question of whether or not $120,000 is a reasonable amount to protect the rest of their assets.

1. Dorothy and or her husband go into assisted living care tomorrow. They've paid roughly $350 for decades of benefit.

1. Dorothy and or her husband go into assisted living at some point in their retirement, but they don't need to stay longer than 90 days. An attorney, Prescott Cole, sited a study that showed 67-70% of those who are checked in to long-term care facilities don't stay longer than 90 days. This is where the elimination period comes into play. An elimination period is basically a time deductible. With an auto policy, for example, you have a $2,000 deductible which is the amount you've agreed to pay before your coverage kicks in. With long-term care the deductible is in number of days in an assisted care facility you agree to pay out of pocket for. If 67-70% of people aren't staying past their elimination period only 30-33% of people are reaping the benefits of the policy they've been paying for.

1. There's the possibility of being a victim of escalation of commitment. This is when your premium rises to a level you can no longer afford, but you've already paid into the policy for 10 years. It's a reality you have to be prepared for.

These are a lot of negatives, but it's important to be aware of these possibilities when you commit to a long-term care insurance policy. The decision you have to make is to either risk funding a policy you'll never fully benefit from, or your assets taking a major hit when they are forced to fund years of assisted living care. It's a decision that requires a lot of careful thought in relation to your personal health history and the realities of your retirement assets.