5 Key Factors to Consider When Buying Long-Term Care Insurance
Submitted by JMB Financial Managers on March 19th, 2020
Buying a long-term care insurance policy can be a complicated process, involving multiple decisions about which features are right for you and what premium you can afford. Among the many choices, there are five key factors to consider:
- The daily benefit amount
- The amount of inflation protection
- The length of benefit payments
- The waiting period before benefits begin
- Your current age
5 Factors to Consider When Buying Long-Term Care Insurance
The Daily Benefit Amount
Determining how much daily benefit you need should take into account several factors. First, what does care cost where you live or expect to receive care? A 2016 U.S. Department of Health and Human Services study pegged the average national cost for a private nursing home room at $225 per day— but daily costs varied widely depending on the area and the quality of the facility. At-home care usually costs more than a private nursing home room.
Another consideration is your basic financial resources, such as retirement income or savings. Do you have any set aside that could help cover part of the cost of care? You can reduce premiums by planning to pay a portion of future care out of pocket.
The Amount of Inflation Protection
Inflation protection is a very important policy feature, especially for younger buyers. Nursing home rates have been going up five percent or more a year, according to the American Council of Life Insurers. That means a nursing home that costs $180 a day today would cost $480 a day 20 years from now—a likely scenario for a 60-year old buying a policy but not needing it until he or she turns 80.
Take note of which type of inflation protection you buy. Some policies offer a choice between a compounding inflation rider and a simple inflation rider. The simple version will cost less but results in smaller annual increases in the daily benefit, potentially leaving you with a shortfall.
The Length of Benefit Payments
How long do you want the policy to pay for coverage? Two years? Three? Five? A Lifetime? The longer the period, the more expensive the premiums. The average stay in a nursing home is 2.4 years, according to government estimates, but of course, some patients remain much longer.
Some professionals recommend buying lifetime benefits if you can afford them, others feel comfortable with five to eight years. One factor to consider is family health. For example, if your family has a history of Alzheimer’s disease, which can result in many years of care, you may want to consider a longer benefit period. Take into consideration the experiences of your parents, aunts and uncles.
The Waiting Period Before Payments Begin
This is the number of months you choose to wait before the insurance company begins making payments. Benefits might begin immediately or within 30, 60, or 90 days, or half a year or longer. Unless coverage begins immediately, you’ll have to pay out of pocket until coverage begins.
Naturally, the longer the elimination period, the lower the premiums. Usually there is a “sweet” spot where you get the best trade-off between savings and the benefits you give up. But run the numbers before choosing the waiting period. Say the period is 90 days. At $180 a day, you’ll pay out of pocket $16,200. But 20 years from now, at five percent annual inflation, that 90-day period will cost $43,200! Will you have the funds?
Your Current Age
The younger you are when you buy it, the less expensive the premiums. You can pay off the premiums over a set period, such as ten years, or pay level premiums for the remainder of your life, assuming you keep the policy in force. (Your state insurance commission can approve rate increases for an entire class of policyholders.) Some professionals recommend buying long-term care insurance as early as your 30s or 40s. Most recommend the mid-50s or early 60s.
Are You Ready to Discuss Your Long-Term Care Options?
The 5 factors above are only part of the picture when looking to purchase a long-term care insurance policy. If you’re ready to discuss your long-term care needs and review the options available to you, we’re here to help. Reach out to us today to schedule a no-obligation consultation or shoot us an email at jack.brkich@ceteraadvisors.com to request a long-term care quote.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
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About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit www.jmbfinmgrs.com.
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