Is buying long-term care insurance worth it? | Smart Change: Personal Finances
After a lifetime of hard work, you’re ready to enjoy your golden years and live life to the fullest, all without the burden of workplace dramas or demanding deadlines. If all goes as planned, you will live the rest of your life happy and healthy.
However, a lifetime of experience will probably have taught you that things don’t always go as planned. Even if you are healthy now, your circumstances may change and you may need long-term care later in life.
Do you need long term care insurance?
According to AARP, it’s estimated that nearly 3 out of 4 seniors will need at least long-term care in old age. Of these, a quarter will spend at least $50,000 in disbursements in their lifetime. Some will pay a lot more – nursing homes can cost upwards of $150,000 a year.
In other words, these costs are substantial. Unfortunately, they are not covered by health insurance, so you may want to consider purchasing a long term care insurance policy to protect yourself against these expenses. Long term care insurance is offered by companies such as Genworth Financial Where MetLife and covers the cost of assisted living, home nursing, home care and adult day care.
However, long-term care insurance itself is also quite expensive. For example, ConsumerAffairs notes that for a 65-year-old male with medical conditions, annual premiums can exceed $2,100. For women of the same age, the premiums are even higher, reaching $3,100 per year.
In exchange for these upfront payments, your hypothetical policy would cover approximately $400,000 in benefits at age 85. If you were to need long-term care immediately, your policy would only cover just over $160,000 in benefits – barely enough for a year’s worth of nursing home care.
Do some math before you buy
Keep in mind that your insurance policy will only remain active if you pay your premiums year after year. If you start paying at age 65 and don’t need long term care until age 85, you will have paid your long term care insurance premiums for two decades before using your policy.
At this point, you will have paid over $42,000 in premiums as a man and over $62,000 if you are a woman. If you need long-term care in a high-intensity environment in the last years of your life, this investment could pay off.
However, it is more likely that you will not face any costs. Notably, the US Department of Health and Human Services estimates that 63% of retirees are expected to incur $0 in long-term care costs over their lifetime, either because they will not need long-term care at all long-term, or because they will have access to substitute care provided by relatives or relatives.
In light of this fact, it may be worth thinking about what would happen if you simply saved the amount you would otherwise have paid in premiums. Assuming you save $2,100 a year and then invest it – achieving a compound annual growth rate of 7% – you’ll end up with over $86,000 after the same 20-year period between 65 and 85. year.
If you save $3,100 a year instead and manage to dial in at the same rate, you’ll be left with more than $126,000, enough to cover a substantial portion of your long-term care costs — if they ever materialize.
To insure or not to insure?
Long-term care is expensive. But so does long-term care insurance, so much so that it may be better to save and invest the money than to spend it on insurance premiums.
Long-term care insurance may still make sense if you expect to be among the small fraction of Americans who will face substantial long-term care costs. But the overwhelming majority of retirees who face expenses that fall within the lifetime cost of insurance premiums could be better served by paying for their care themselves.
By carefully considering your options and assessing your health, family situation and financial situation, you will have a good idea of how to organize your health care needs in old age – long term care insurance or nope.
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Dumb Contributor Ryan Sze has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.