Long term care insurance provides coverage for people who need assistance with daily living tasks because of mental or physical disability. Assistance can be as little as a few hours a day of in home help or as much as 24 hour a day supervised residential care for Alzheimer’s patients. Care can involve a few weeks of temporary assistance, or it can be permanent.
Long term care can be a minor expense, or it can be the iceberg that sends a retirement vessel to the financial bottom. That is why long term care is one consideration that needs to go into a retirement plan and as with most retirement strategies, the sooner the better.
Assuming that long term care insurance is a part of a retirement plan, when should the purchase be made? One timing issue comes down to balancing risk and annual premiums. Long term care is like other insurance products — the less need one has for it, the easier it is to qualify for it and the less expensive it is.
Generally, a healthy 45 year old can purchase a policy for a far lower annual premium than a healthy 65 year old, but by purchasing at 45 instead of at 65, that person will be paying those annual premiums for 20 years longer. On the other hand, a 45 year old who decides to wait until later to make the purchase, has a chance of developing a serious medical condition in the meantime.
There are two consequences if a medical condition occurs before long term care is in place. First, if the condition requires long term care, there will not be coverage for the expense. Second, as a person who is no longer healthy, it might not be possible to qualify for a policy at all.
There is another timing issue to consider. “When” to buy long term care insurance may be a moot question before too long. More and more long term care insurance providers are getting out of the market. Unfortunately, the reason why the insurers are getting out of the market simply underscores the reason why having the insurance is attractive in the first place. People use long term care, and long term care is expensive. Insurance providers are finding that they cannot offer traditional long term care insurance policies for a price that consumers will pay.
Providers will continue to honor policies, even after they stop writing new ones. For all of these reasons if someone knows they want long term care insurance and can afford the premiums, the best time to buy would be soon.
What are the other options available for long term care coverage? The first option is not to buy any coverage at all. This is the option for the top and bottom ends of the market, and this is the reason why insurance providers are having a hard time finding a pricing sweet spot. At the top end of the market, a very well funded retirement plan can self-insure long term care without scuttling the retirement ship. That means that no one who can easily afford high long term care premiums needs the product. At the bottom end of the market, social assistance will cover some residential and home health care costs, but only once the patient has exhausted all personal resources. Any retirement fund that can easily be exhausted should not include long term care premiums.
What about the middle of the range? Again, people use long term care. There is a need for long term care coverage in the market. Insurers have been working to find a coverage option that is attractive to that middle range of customer.
The most commonly used option is a single payment annuity/life insurance policy with a rider to permit use of the account funds for long term care needs. These policies are attractive for several reasons. They are easier to get than long term care insurance because they bypass the stringent health requirements of a typical long term care policy. These policies have residual value (the maturity value of the policy, less any withdrawals taken for care costs) where traditional long term care policies have none. Not so attractive is the fact that the buyer has to have the full premium amount (well over $50,000) available at the time of purchase.
There is one last timing consideration regarding long term care insurance. Although the Health Care Reform Act sought to establish an affordable long term care option through the Community Living Assistance Services and Supports Act, this program was shelved late in 2011 and may not be revived even now that the 2012 elections are over. Unfortunately, a CLASS Act long term care policy is not likely to be available. It is certainly not an option anyone should wait for.