Bob looked over the long-term care (LTC) material his financial planner had given him earlier in the day. He looked at the cost of the policies that the financial planner had recommended to him, and did not relish having to pay the cost of those premiums for many years. If both he and his wife need any form of care, they will be in trouble without coverage, but if only one of them does, then their savings might be sufficient to cover the necessary expenses without having to pay premiums. Of course, if they get lucky and incur little or no LTC expenses of any kind, then they will save thousands of dollars.

TUTORIAL: Intro To Insurance

This is a common dilemma among older middle-class workers. The question of whether they should go ahead and spend money on LTC insurance, or just assume the risk themselves is a difficult one. Read on to find out how several variables relating to health and finances must be considered in order to find out the answer. (For background reading, see The Evolution Of LTC-Insurance Plans and Long-Term Care: More Than Just A Nursing Home.)

Factors to Consider
Health and longevity will dictate the necessity for coverage. For individuals with families that have a history of health conditions, such as Alzheimer's disease, obtaining coverage at an earlier age, when they are still insurable, may be of paramount importance. Regardless of whether the need stems from longevity or illness, if the odds are historically, or statistically, likely that LTC will be necessary, then anyone with assets, that they would like to protect, better be adequately insured. However, those with no family history of disease may play the odds and save their money instead.

Health issues are not the only consideration for those in the middle class. LTC insurance, generally, only makes financial sense for those who have sufficient assets to disqualify them for Medicaid. The opportunity cost of paying for premiums, can also play a major role in determining whether carrying LTC insurance will be cost effective. For example, some of the best policies offered through an insurance company, that covers a variety of care options, sufficient financial payout and with inflation protection, may cost around $3,000 per year for a 50-year-old and $5,000 per year for a 65-year-old in 2006, according to the AARP.

Therefore, if the insured is placed in a nursing home for two years, a total benefit of $127,750 will be paid out, assuming the benefit pays out $175 per day. But the premium outlay for this coverage would total approximately $60,000 over 20 years for the 50-year-old. So, the benefit received, in this case, would only be about two times what the policy owner paid in premiums to begin with. The national daily average for a private room in a nursing home in 2006 is $206 per day. That means without any insurance coverage, you would be looking at $75,190 annually. Therefore, if the insured has been paying premiums for two years and then files a claim, he or she will come out further ahead.

Generally speaking, the odds that someone in his or her 50s, or even their 60s, will need extended LTC are fairly low, assuming the person is relatively healthy when coverage is obtained. For those who do not anticipate that they will need extended LTC, the premium payments may not be worth the opportunity cost.

Example - Premium Cost Vs. Opportunity Cost
A 50-year-old buys a 20 year paid-up policy. The benefits provided by the coverage must be weighed against the return that can be gained by investing the cost of the premiums over the same amount of time. If $3,000 is invested annually, with an average annual growth rate of 7.5%, that will grow to a hypothetical balance of around $130,000 over 20 years. While these numbers will obviously be depleted if LTC is necessary, they will remain as cash balances for the investor if it is not.
If the investor, in this case, feels reasonably certain that care will not be necessary until after age 70, then investing the premiums may make more sense than purchasing coverage. This leaves the investor with the funds to use towards other expenses, or pass on to heirs if extended care is unnecessary. (For further reading, check out Long-Term Care Insurance: Who Needs It? and Taking The Surprise Out Of Long-Term Care.)

A Critical Mistake
One compromise that may make sense, to those seeking to cut the cost of their LTC coverage, is to buy a cheaper policy that excludes critical features such as the inflation rider, or a choice of care options. Most experts recommend that it is better to go without LTC insurance than to pay for a policy with inadequate coverage. A policy that does not contain these provisions, is, in many cases, a waste of money, because the major provisions of most competitive LTC policies are what provide the real protection from LTC expenses.

For example, because the cost of LTC can increase as a result of inflation, an inflation rider is almost imperative. Without it, the policy's protection will become inadequate within a few years, as inflation will push the price of adequate LTC well beyond what is provided by your payout. Furthermore, being able to choose the method of care received, by the insured, is also important, as few people want to be put in a nursing home to receive services that could be provided by in-home care.

Balance Sheet Considerations
Another issue that those contemplating LTC must consider, is whether their post-retirement budget will sustain the cost of LTC premiums. Many workers can expect their incomes to drop substantially once they retire. So those who purchase coverage, during their working years, must factor this eventual reduction in their future incomes into their long-term budgets. Most planners recommend that a client, with limited means, focus on saving for retirement rather than paying for LTC coverage. Of course, those who will have smaller budgets, once they retire, may not have enough assets to require insurance. The requirements to qualify for Medicaid differ from state to state, but in order to qualify, elderly individuals, and couples, are restricted to the amount of assets that can be owned. Therefore, lower income retirees, with relatively fewer assets, may qualify for Medicaid. Those with higher net worth, should take note that some states have established partnership programs with the federal government that enable their residents to shelter a certain amount of their assets from the Medicaid spend-down process, if necessary. This, of course, allows them to retain a portion of what they own, and still qualify for Medicaid. (For more insight, read Medicaid Vs. LTC Insurance and What's The Difference Between Medicare And Medicaid?)

Finally, there are alternative sources of LTC funding available through annuities and universal life insurance products that offer accelerated benefit riders for LTC and disability. (For more information on universal life insurance, see A Multipurpose Future Planning Tool.)

The LTC equation has two main components: medical and financial. Both issues must be evaluated, realistically, using some combination of personal preference, probability and statistics in order to determine a sensible course of action. There isn't one right answer for any couple or individual; many will have several options to choose from based on their risk tolerance, and personal situation.

Related Articles
  1. Retirement

    Will Your Retirement Income Be Enough?

    Find out how to determine whether you're on the path to a comfortable retirement, or financial ruin.
  2. Home & Auto

    How To Avoid Medical Debt

    Find out what you can do to avoid a financial meltdown when there's a medical emergency.
  3. Home & Auto

    Long-Term Care Insurance: Who Needs It?

    No one is immune to the possibility of one day needing long-term care - and the costs can deplete a life savings.
  4. Options & Futures

    Long-Term Care Insurance: You Have Options

    The latest offerings provide more coverage and the ability to pick and choose what types of coverage you'll need.
  5. Insurance

    Medicaid Vs. Long-Term Care Insurance

    These are not equal. Here's why you need to think twice before relying on the government-sponsored program.
  6. Options & Futures

    20 Ways To Save On Medical Bills

    Handy tips to cut the cost of hospital bills, co-pays, prescription drugs and more.
  7. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  8. Insurance

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  9. Insurance

    Using LinkedIn to Find Life Insurance Leads

    Learn how LinkedIn can help you generate leads as a life insurance agent, and understand the steps to turn your profile into a lead-generating machine.
  10. Investing

    Soul Cycle vs. Planet Fitness

    How has the fitness industry's shift from multipurpose health clubs to specialized studios and budget gyms played out for SoulCycle and Planet Fitness?
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  5. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  6. Can your life insurance company sue you?

    A life insurance company generally cannot sue you, but it can sue your estate. The company may do this in order to recover ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!