My mom asked me about long term care insurance recently and I started to mull over the financials to see if it made sense or not. We had some experience with other distant relatives that had to tap the insurance and in one case, they were surprised that they didn’t qualify when they thought they would due to the fine print. First, it’s worthwhile understanding what it’s all about and how it might help you or your loved ones as they age.
What is Long Term Care Insurance?
Long Term Care Insurance is different than your conventional health insurance or life insurance. It’s insurance that’s meant to offset the costs associated with long-term care you may need in the future, typically a consideration for the elderly who anticipate health issues in old age.
Key considerations of Long Term Care Insurance
At a high level, you get what you pay for, right? So, if you’re looking for very generous coverage, you’re going to pay high premiums. The key facet of these programs is that it’s not just getting insurance payouts for “getting sick”, but rather, you’ve got to qualify for a series of activities that you’re unable to perform and then the policy pays for support to perform those duties. For instance, if you can’t perform pre-determined activities like dressing yourself, feeding yourself, etc., the policy would generally cover the cost of either a long term care facility or in-house assistance.
Your health and age matter quite a bit in what kind of rate you’re going to pay. On the applications I reviewed, I noticed they asked about tons of different ailments and whether you were EVER or within the past 10 years, diagnosed with certain ailments. Of course, the older you are, the more likely it is that you’d need to tap the policy as well, so those risks are factored into the premiums.
Unlike what you’ve probably heard in the news about certain malicious health-care practices, the insurance company can’t cancel your policy once you become sick. Once you sign the policy, the actual language of the policy can’t change and you should be able to continually renew for life. For that reason, some advisers advocate that you start a policy early in life. You’ve got to balance that with the costs though.
Let’s say you purchase a policy from a major carrier that has a premium of $3000 per year and provides coverage for up to $250 per day of expenses for up to 6 months, but it only kicks in after a waiting period of 120 days. These are some typical key terms you’d see in a policy. So, let’s say you have an ailment that requires an extensive hospital stay followed by an assisted living facility, but it’s only about 2 months that you’re out of your house, the policy wouldn’t pay out to assist at all since you hadn’t hit the 120 day threshold. This is often a surprise to people who sign up for these policies without reading the fine print. Another catch is that you may have to fail to be able to conduct 3 or 6 or some number of activities as opposed to just one. So, if you can’t dress yourself, but you can feed yourself, use the bathroom and do everything else, the policy may not be activated. Therefore, it’s key early on to really understand what you’re buying.
Insurance is not an investment. You don’t actually hope that you need it, just like you don’t hope you die to collect on life insurance and you’re not rooting for a wreck to have a “positive ROI” on your auto insurance. It’s a risk mitigation tool. Can you personally weather a catastrophic event in your life from a financial standpoint? If so, then there’s no need to consider it. If not, then you’ve got to consider whether the premiums, the coverage and the likelihood of such an occurrence equate to a prudent use of funds for a policy.
Personally, my wife and I don’t have policies, and probably wouldn’t consider one in the future since the premiums are very much likely to exceed any benefit we’d see (the insurance company’s gotta make a profit, right?) and we have other assets/insurance to help cover such circumstances.
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