At What Age Should I Obtain Long Term Care Insurance?

In Estate Planning, Insurance, Personal Financial Planning, Retirement Planning by Chip Hymiller

A major consideration when conducting a retirement feasibility analysis for clients is how potential long term care costs would be covered.  With the cost of long term care increasing at a projected rate of 5% to 7% for the foreseeable future, in ten years from now a three year stay in the average facility in North Carolina could cost upwards of $380,000. 

Disclaimer:  Planning for the possibility of long term care is a key component of Beacon’s Retirement Feasibility Analysis service.  As a fee-only financial planning firm, Beacon Financial Strategies does not actively market or sell any insurance (or other commissionable) products.  However, we do consult and educate clients as to the appropriateness of obtaining coverage and the differences between policy types and carriers.  This article is a generalization and should not be construed as advice since all client situations vary.

Consider that following statistics compiled by the non-profit organization, American Association of Homes and Services for the aging:

For a couple turning 65, there is a 69% chance that one of them will need some sort of long term care assistance.

With long term care costs increasing by 5% to 7% annually, a three year stay in a nursing facility in ten years will likely cost in excess of $300,000.

Given the huge financial burden that long term care costs could inflict, more and more people are choosing to obtain long term care insurance.

During our discussions with clients, we are often asked the question, “At what age should we get long term care insurance?”  Jokingly, our response is usually “a few months prior to you needing long term care.”

Long Term Care Insurance can be purchased at any age, but every year a person waits to get the coverage, the price increases.

So what is the right age to think about purchasing coverage?

In general, the current trend is to buy long term care insurance when a person is in their mid to late 50s.  In 2000, the average age of new policy holders was 67; in 2007, the average age was 58.  While the right age depends on a person’s own health and individual circumstances, below is a list of variables that could impact the cost of long term care insurance.

According to newly-released 2008 Long-Term Care Insurance Price Index, the cost of long-term care insurance nearly doubles for a person now 55 years old compared to a 65-year-old buying the same coverage. For example, a 55-year-old married person purchasing $150-per-day benefit for a maximum of three years would pay an average of $1,064 a year and a single person would pay $1,578, which includes in-home care. The same policy for a 65-year-old is $2,013 annually for a married individual and $2,998 for a single person.

Cost of Care

As the cost of long term care increases, insurance companies must raise rates to keep up with the costs.  According to Genworth Financial, the average annual rate for a private nursing home is $76,460—up 17% from 2004.  This increase represents a 4% compound annual growth rate over the period from 2004 to 2008.  Similarly, the rate for assisted living facilities has increased by nearly 6% over the same period.

Health

A person with a negative health rating may find it difficult to obtain insurance coverage.  Even if they are eligible for coverage, the more health problems a person may have the more expensive their policy may be.  Ideally, the best time to purchase a long-term care policy is a few months before a health decline.  Since it is impossible to predict health changes, there is a benefit to planning early.   A study done by one long term care insurance company found that 51.5% of applicants in their 50s qualify for preferred health discounts versus 42.2% who waited until their 60s.

Long term care can play a pivotal role in a retirement feasibility analysis.  Each person needs to analyze whether long term care insurance will increase the odds of a successful retirement.  If you have questions about long-term care insurance and how it fits in your overall financial plan, please give us a call.