Is short term care insurance a good idea?
I have talked with an insurance agent and been approved for short term care insurance. I am 65 and in good health. I just haven't heard about it before and wanted to know if this is a good product. I was told by the agent that their company was the only one selling short-term care (versus long term care) in N.C.
Every situation is different, however it may be beneficial to attempt to set aside enough funds to cover any type of short term insurance that you would need, as an example an emergency fund. Generally it is recommended that an emergency fund of safe cash or other type of investments in the amount of 3 to 6 months expenses be set aside, for an emergency such as short-term needs. Again each situation is different but it may be more economical to just set aside enough short-term funds to avoid the short-term insurance cost.
In short: no, it is not a good idea, and an insurance agent is not able to give objective advice, as they have an obvious conflict of interest here.
Insurance works best for events that are 1) unlikely to occur, and 2) catastrophic if they do occur.
The need for short term care is not unlikely to occur, nor is it catastrophic if it does. I would estimate that one in three retirees will require short term care at some point in their lives, and the cost in today’s dollars if we assume a one year need at $8,000 per month is approximately $100,000. Anyone for whom a $100,000 expense is catastrophic is likely going to run out of money in retirement regardless of whether a short term need for care arises or not. For retirees of limited means, it is quite easy to become “insurance poor” ; paying premiums for all sorts of insurance, and suffering financially as a result even if none of the insured events takes place.
Other examples of inappropriate insurance include vision and dental insurance. Neither of these costs is unlikely, nor catastrophic. Rather than reducing risk, these policies tend to simply funnel expenses through the insurance carrier, while adding on the costs of administration and the insurance company profits. It is better to simply pay the expenses directly.
Examples of appropriate insurance include life insurance for a dependent spouse beneficiary, fire insurance on a home, catastrophic medical insurance, and auto liability insurance. These insure against events that are unlikely to occur, but they can cause catastrophic financial loss if they do. Because the events are unlikely, the insurance issuers need not pay out claims very often. This serves to lower the premiums, and spread the costs over a larger group of people, while paying out large claims to those who suffer the unlikely event.
In regard to the short term care insurance question, I would go a bit further and say that the advisability of even long term care insurance is questionable. A long term care need is not terribly unlikely, nor is it necessarily financially catastrophic. Consider that if someone requires long term care, it is likely a permanent situation. Thus, the home can be sold to pay the costs. Often the equity in the home is sufficient to pay for many years of coverage. In recent years, the claims experience of long term care issuers has been dreadful, causing them to raise premiums and lower benefits. In certain situations it can be appropriate, but in my opinion it is often better to “self insure” if assets are available to sell to raise the funds. Of course if a primary objective is to pass on assets to heirs, this will color the decision in favor of the long term care insurance purchase.
I hope that this is of some help in your decision making process. All the best to you!