Buying Long Term Care Insurance Now Is A Smart, Cost-Effective Move

Planning ahead can be an enjoyable activity when it involves something we are looking forward to, such as a vacation. Nobody, however, enjoys planning for those future events that represent difficult periods in life, such as illness, incapacity, or death. As a result, we sometimes put off taking the steps that would help ensure our financial security-or that of our loved ones-during such difficult times.

Planning for long-term care needs is one of these hard-to-face matters. We don't like to think ahead to a time when we might be unable to independently engage in the activities of daily living. However, when one separates emotion from reality, it's easy to see that planning for long-term care needs is a good idea.

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By some estimates, an individual's chances of needing long-term care at some point in life are nearly one in two. America's Health Insurance Plans, a national trade association, cites statistics showing that people age 65 face a 40% lifetime risk of entering a nursing home. And, quality care comes at a high price. Nursing home care averages more than $50,000 annually, and residence in an assisted living facility averages more than $25,000, according to surveys by one long-term care insurer. Furthermore, the cost of home care-an option preferred by many people-can run $20,000 annually for only a few hours of care a day.

These numbers make a strong case for considering long-term care insurance as a financial planning tool. Most likely, these reasons for considering long-term care insurance won't change in the future. What will change are the cost of care (it will only increase, due to inflation) and your cost-or ability-to obtain long-term care insurance coverage, due to aging and any illnesses that affect your insurability.

Let's look at long-term care insurance policy costs. According to information provided by the American Association for Long-Term Care Insurance, at age 40, the cost of coverage under a policy that includes inflation protection and that pays for four years of care up to $100/day runs about $640/annually. The same coverage costs $850 if purchased at age 50, $1,725 at age 65, and $5,820 at age 79. (Remember that policy costs will vary widely, depending on the specific terms of coverage.)

Some will look at these figures and, while acknowledging the higher premium that will apply if coverage is first obtained at a later age, say, "Yes, but I'll save money by waiting. If, instead of buying when I'm 40, I wait until I'm 50 (or 65 or 79), I'll save 10 (or 25 or 39) years of premium payments." What this statement overlooks is the fact that, if long-term care is needed during that 10- (or 25- or 39-) year period, its cost can easily exceed what would have been paid in premiums. For example, suppose an individual defers purchasing the hypothetical policy and, at 45, has an accident and needs long-term care. By not having purchased the policy, the individual "saved" $3,200 (five years of premiums at $640/year). But that "savings" will quickly be depleted-and exceeded-by the cost of care.

It is not extreme to use a 45-year-old in the example, as the need for long-term care is not always tied to age. According to the Federal Long-Term Care Insurance Program, 40% of those needing long-term care are working adults age 18-64. Still, many resist buying long-term care insurance because they see the annual premiums as money down the drain, while readily paying for other types of insurance, such as homeowners' and auto. However, the chances of incurring home damage or of having an auto accident do not approach the odds that one will need long-term care.

So, instead of thinking of long-term care insurance as expensive, think of it in relation to the cost of the care it will cover. Buying coverage while still relatively young and healthy will enable you to affordably include your long-term care needs as part of a smart, complete financial plan.

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