September 08, 2006

Under What Circumstances Does Buying Long Term Care Insurance Make Sense?

In my last entry, I discussed the potential risks of needing long-term care (LTC). When does it make sense to consider LTC insurance? Here are some of the circumstances where it may make sense:

-The Financial Middle: For those with few assets, it just doesnít make sense because you would be eligible for Medicaid and the cost of insurance would be unaffordable. For the affluent, the care would be affordable. But it may make sense for those in the financial middle; ones who managed to build a decent nest egg, but not enough to sustain a prohibitive care need. Not sure if you are ďin the middleĒ? For example, say that you have to enter a care facility that costs $65,000 a year, you receive Social Security and pensions totaling of $45,000 and you have a nest egg of $500,000. If your portfolio was positioned for long-term growth, you can reasonably expect to take out enough from your portfolio to meet your needs. If you have a gap, thatís when insurance should be used. Although each individual has their own unique set of circumstances, this is a simplistic way to at least initially approach this.

-The Conservative Investor: A stay at a long-term care facility may be affordable now, but for the low risk investor it may not be affordable later. This is primarily because LTC costs are growing at a higher rate than inflation. If you keep all of your assets stashed away in cash, fixed annuities/pensions and bonds, it is unlikely that your purchasing power will keep up to cover the cost.

-Qualitative Circumstances: If you have an unrelenting worry about how you may pay for potential care costs it may be worth the peace of mind to be insured if you can afford the premiums. Also if you donít want to be a burden to your loved ones, this insurance can help alleviate this. You may simply not have any family members or loved ones you can fall back on in your immediate area, making LTC insurance more desirable. In addition, LTC insurance may provide the additional means to receive the quality of care you desire. Finally, women are more likely to be subject to an extended care facility than men.

-Desire to Leave a Legacy and Avoiding Medicaid Planning: You may be affluent enough to pay out of pocket, but have a desire to leave money to your heirs, charity or donít want to disrupt your assets. It also may help avoid the ethical and logical issues surrounding Medicaid planning as it is certainly questionable to manipulate a welfare system if you have the means. Also many Medicaid strategies involve repositioning assets in a way that would defy logic for any other circumstance. Eligibility isnít getting any easier either and with projected budget shortfalls; itís going to become even more difficult in the years to come. And Medicaid isnít a bed of roses. Being eligible for Medicaid doesnít guarantee that you will receive the quality of care, the location, or a permanent spot if you have to spend time in the hospital. It may make a lot more sense to insure yourself and have the flexibility to find the level of care that you want for the rest of your life.

In the end, LTC insurance certainly makes sense to cover risk that you canít afford to lose, but it also can go beyond the numbers logic and simply be worth it for the peace of mind that it provides. And with that, anyone who could afford to pay the premiums for LTC insurance should at least consider it.

Posted by Jeff Bogue at 08:51 AM

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