At one time, long-term care insurance was only suggested to individuals who were 60-years of age or older. However, baby boomers who are approaching this age may also consider the coverage, as they may have medical conditions in the future that will not allow them to obtain it.
Long-term care insurance (LTCI) is available only when a person is insurable, as determined by an insurance company. Once a catastrophic illness has stricken you, you probably are not going to be insurable any longer. In addition, the sooner you buy long-term care insurance the lower your premiums will be, although you will pay for the policy for a longer period of time.
Although there are many considerations that should be made in determining whether or not you should have long-term care insurance, there are at least four major issues to consider.
1) Determine the amount needed
Ensure that once earned income is terminated and you are retired, there will be sufficient income and assets available to pay for the insurance. This type of insurance is needed more in later years than younger ones, so you must be able to afford the premiums later in life. If you have to drop it then, you will have basically wasted your money. If this concerns you, you may check into a policy where you pay more in early years, what is known as short pay, and then it is considered in-force but paid up.
2) Time your purchase
Don't wait too long to purchase your policy, but also do your due diligence in determining the type of policy and amount necessary to suit your needs. You may decide that you can self-insure a portion of long-term care but don’t wish to pay 100% out-of-pocket. You may determine that a specific dollar/day benefit is necessary, and then you can afford to pay any amount in excess of that. You may also determine that you want an inflation rider so that as the cost of care increases, the amount of the coverage also increases.
In addition, you should consider the length of coverage, such as three-years, five-years, or lifetime.
Naturally, the more coverage you purchase, the greater the premiums will be. In the event that you have other benefits that will pay for some of the cost of your care, such as Social Security benefits, private pension, veteran’s benefits, etc., you may purchase reduced coverage to fill any anticipated gap.
When looking at the policy, it is important to consider where you want to retire. For instance, if you’re living in a state where the cost of long-term care is only $5,000 a month, but you’re considering moving to a retirement community or state where the cost of care is double that amount, may be necessary to purchase more coverage.
3) Tax considerations
What tax benefits are available from the policy? You should consider whether the long-term care insurance policy is a taxed favored plan, whereby you gain a deduction for a portion of the premium paid on an annual basis. However, if you don’t itemize your tax return, or if the premium is not significant enough to allow you to itemize with the excess of 7.5% of your adjusted gross income being allowed as a deduction, then perhaps a tax favored plan is not appropriate.
If you own a business, you should also consider using company funds to purchase your coverage and pay the premiums, as this provides significant tax benefits to a business owner. Your accountant should be considered as a resource to guide this decision.
4) Peace of mind
Similar to purchasing life or homeowner’s insurance, this policy is also one that will hopefully not be used. However, a significant piece of mind comes when you don’t have to worry about giving away assets and transferring your house to your children, since your long-term care coverage will insure your risk of being institutionalized or requiring care at home.
Naturally, there are lots of bells and whistles with long-term care insurance, such as the potential to earn a return of premium, whether upon the death of one policy-holder, the spouse may not have to pay premiums in the future, or whether there is some return of premium you die under a certain age, etc.
Since not all policies are the same, you most compare apples to apples and make sure you understand the definitions and requirements for payment of care when claimed. As always, your financial advisor and other estate planning team members should be involved in the process of selecting your long-term care insurance.