Is Long-term Care Insurance Worth the Cost?

What is long-term care insurance?

Recently, we’ve seen some articles and had personal conversations regarding long-term care insurance. We feel the topic is timely and might be a good one for this issue of Financially Speaking. To start the discussion, let’s get a good baseline for exactly what long-term care insurance is. Long-term care insurance is a special insurance that operates differently than traditional health insurance.

While health insurance is very good at covering short-term needs, including surgery and hospital stays, it won’t cover costs for extended care in nursing homes or assisted-living facilities, or even home assistance to address activities of daily living. Medicare also does not cover these extended care needs as a form of health insurance. Medicaid can cover some of these extended care expenses, but only for people of limited financial means. Generally, that is the case for all Medicaid services; it is designed to support those with lower financial means.

What does long-term care insurance cover?

Long-term care insurance addresses extended health care costs if a person needs to be in nursing, assisted living, or in-home care. Policies are designed to pay up to a certain cost level, and for a limited period, usually five years maximum. The coverage has limits and may not provide the level of protection desired. In the case of an unfortunate person who needs care at a younger age and then lives for many years needing that extended care, the coverage will likely run out.

The general logic for owning long-term care insurance is that it may prevent a person from spending their savings to cover extended care costs. These costs can be substantial. Our research has shown that a semi-private room in a nursing facility in 2023 cost $8,669 monthly, or $104,025 annually. This is the average, and the costs do change depending on what state you live in. To put this in perspective, if you have a $1,000,000 personal portfolio and need long-term nursing care for five years, then after paying for it yourself, your portfolio would be reduced to about $500,000. Many people fear this reduction in what they leave to their beneficiaries and buy insurance to help guard against it. That’s an understandable concern and protective action.

How much does long-term care insurance cost?

The big challenge when considering long-term care insurance is its cost. Our research shows that in 2022, a 55-year-old man would pay about $2,200 per year in premiums for $165,000 in long-term care coverage. And that $165,000 in coverage would only cover about 1-1/2 years in a nursing home. Covering a larger amount would obviously raise the premium rate. For many people, that $2,200 insurance premium would be a burden. So, the big picture here is that we must choose to buy somewhat expensive insurance to reduce or eliminate the chance of spending down personal assets. Not always an easy choice.

Long-term care insurance has other advantages, such as relieving the burden on family members if care is needed and inflation protection on covered costs. Disadvantages to long-term care insurance are some limits to what items are covered by any specific policy and the fact that if you pay the premiums and then never go into long-term care, those premium costs are entirely lost. Unlike life insurance, where a portion of premiums can be paid out to a beneficiary, there is no recourse to paying for long-term care insurance.

Our thoughts on long-term care insurance

From our point of view, we tend to lean against buying long-term care insurance for two reasons. First, the costs are high and going higher. If you have a policy, it is possible that the insurance provider can raise your premium, which adds a degree of uncertainty to the cost. Second, the chances of needing this kind of care are limited. According to the Department of Health and Human Services, only 35% of people ever need care in a nursing facility, and when they do, the average stay is only a year.

So, from our view, if you have less than a 50% chance of needing nursing care, spending down personal savings to cover one year in a nursing home isn’t worth the up-front cost of long-term care insurance. However, we strongly recommend that you have this conversation with your financial professional, as your personal health and family history may offer more justification to purchase long-term care insurance.

All the best,