Critical Question: Should I Invest in Long Term Care Insurance or Look at Other Investments?
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UPDATED: Aug 13, 2020
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The simple answer to the question of when to buy long term care insurance, is as soon as possible, subject to your ability to pay for it. (See the article titled, “When Should You Buy Long Term Care Insurance?”) Total premium outlay is actually less expensive the earlier you buy it. In other words, for each year you wait, the total premium outlay will be more. If you agree there is a need for long term care insurance, you must determine if you can afford to pay for it now and in the ensuing years. For some people, it may be smarter to wait to be certain you can comfortably afford the premium – even though you will pay more.
Other questions may arise as you consider long term care insurance.
Would I be better off to invest the money I would pay in premiums and use that when, and if, the time comes?
That depends on your age when you buy insurance and what the premium would be. If you were to save and invest the money you would otherwise use to pay premiums over a 6 year period, for example, and then became so disabled that you needed long term care, all the money you saved during that 6 year period could easily be used up within 6 months.
Further, if you invest the money, instead of using it for a long term care insurance premium, how would you pay if you suddenly need long term care12 months from now? You would have virtually nothing saved compared to what you might need to cover the cost of long term care.
If I have the assets to cover the cost of long term care, why should I waste my money on insurance premiums?
The same question could be asked about your auto, homeowner’s or medical insurance. Why not self insure against those risks as well? If you have the assets, you could assume the risk for any area of potential liability. You MIGHT save a little money if just pay for damage to your cars or loss of your home yourself to save your premium expense. You MIGHT even come out ahead. But, on average over time, no matter what the risk, the total premium cost is usually a fraction of the cost of paying from your own pocket. People buy insurance to preserve assets, leveraging premiums to buy benefit for pennies on the dollar instead of paying dollar-for-dollar out-of-pocket for a loss. Still, it’s a matter of odds. The probability of a house fire is 1 in 1200 and the probability of a major auto accident is 1 in 240 but we insure against those. (Thomas Day, “Long Term Care Insurance”, p.3, 2007). The probability of needing long term care is closer to 1 in 2. If you are wealthy, you might take the risk that you will be the other person. If you are wrong, you can afford it. But otherwise there is long term care insurance.
Why don’t you get your money back if you don’t use the insurance?
To respond to this objection, many companies now design long term care polices with cash values, life insurance death benefits or return of premium at death. Adding these features, however, increases the long term care policy premium. In other words, the policy is designed by actuaries to provide you with long term care benefits for a certain premium. Competition among insurers keeps that premium from going higher than necessary. To add a return of cash value feature requires additional premium to accrue that cash value.
The same question could be asked of auto and homeowner’s insurance. With those types of insurance, you are likely to have your coverage cancelled or premium increased if you file a claim, neither of which will happen if you file a long term care claim. And the likelihood of a long term care claim is much higher than it is for an auto or homeowner’s claim.