The cost of long-term care insurance has risen over the past few years. Many carriers have increased premiums by as much as 40% and several of the largest carriers, like Prudential and MetLife, have discontinued offering LTC insurance to new individual policyholders.1 Why the changes? Many insurers have experienced low returns for the assets they reserve to provide policy benefits. In addition, they have received a higher than anticipated number of payment claims. This combination forced insurers to change LTC insurance policy pricing. So, is it still worth it?
Naturally, the answer to that question is based on each person or family’s financial and health situation, so it’s difficult to make generalizations. That said, LTC insurance can be evaluated like any financial instrument. Consider this hypothetical scenario2:
A couple, both age 55 and in reasonably good health, purchases a long-term care policy for each spouse providing $200/day in benefit, which increases by 5% compounded annually, for a duration of 3 years after a 90-day elimination period. The policy provides the same amount of benefit whether care is provided at home or in a facility. One of the leading carriers would offer this policy for about $6,500/year in a combined annual premium.
Assume that one of the spouses requires long-term care for 3 years starting at the age of 80. By that time, the daily benefit would be $677/day (after the 5% annual compounding), for a total of $247,204 in annual benefit.
If the couple had not purchased LTC insurance, and instead “reserved” the $6,500/year in premium, they would have had to earn about 9.77% net of taxes and expenses to provide an equivalent pool of assets to cover long-term care expenses.
Long-term care insurance can be a very useful financial asset. That, of course, is the rub – there’s no way to predict whether you use it or not. However, if you don’t, you might improve the likelihood that your LTC insurance investment will pay off. Here are some options to consider:
— If you are applying with a spouse or partner, look for a policy with a “shared care” provision. This feature transfers any unused benefit from a deceased spouse or partner to the survivor.
— Consider one of the new “hybrid” long-term care insurance policies, which combine the features of life insurance with long-term care insurance benefits. These policies can ensure that some benefit will be paid from the policy, either when care is needed or at death. The trade-off, as you might expect, is that premiums are generally higher than traditional long-term care insurance.
Your financial advisor can be an important resource as you make decisions about long-term care insurance. He or she can help you identify and evaluate all of the options available to you.
