Long term care insurance provides insured’s with access to benefits to cover the cost of long term care services. Services can range from home health aide to nursing home care. The cost of services received varies based on the level of care and physical location of where care is received.
For example, the median annual cost for a semi-private nursing home room in Texas averages $46,355, while in the state of New York the same level of care averages $114,975 per year. In both states, the cost of this level of care has increased by 4% on average over the last six years, according to the Genworth 2011 Cost of Care Survey.
When individuals begin to consider long term care insurance one of the most common questions is what age is the right time to purchase coverage? In other words, is it better to purchase coverage today or wait 10-years?
The primary motivation behind this question is usually financial. But, there is another piece people should consider before completely focusing on the financial aspect. Because individual long term care insurance is fully underwritten, individuals must medically qualify for coverage. Each individual long term care insurance policy is fully underwritten by the issuing insurance company. This means the insurance company will determine, based on their underwriting criteria, whether or not the insured will be eligible to qualify for coverage based on their medical history and prescription medications.
According to The 2011 Sourcebook for Long-Term Care Insurance Information published by the American Association for Long-Term Care Insurance, 11 percent of applicants under age 50 were declined for coverage in 2010. Applicants between the ages of 50 – 59 were declined 17 percent of the time, 24 percent for applicants between the ages of 60 – 69, and 45 percent for individuals between the ages of 70- 79.
The cost of long term care insurance is based on the insured’s age when coverage is obtained – the older the applicant the more expensive the coverage. When making a comparison of purchasing coverage today versus 10-years from now the insured must also consider what the cost of care will be in the future.
According to the Genworth 2011 Cost of Care Survey the median daily rate for a semi-private nursing home room in the United States is $193 per day. The six-year annual growth rate for this level of care has been 5 percent. Assuming 5 percent growth, the $193 median daily rate will increase to $314 per day 10 years from now.
In order to make an accurate comparison, the insured needs to take into consideration what a policy would cost today compared to what it would cost at their age 10-years from now – taking into account what the cost of care will have increased by during that time.
For example, let’s assume a husband and wife, both age 55, are considering a policy with a $200 daily benefit, 3-year benefit period, 90-day elimination period, and 5% compounded inflation (Scenario 1), today. In order to make an accurate comparison ten years from now, the policy will need to provide each insured with a $325 daily benefit (Scenario 2).
When making this type of comparison it is difficult to predict what the cost of a long term care insurance policy will be in the future. Will the cost of coverage be more or stay the same or less than it is today? Unfortunately, it is difficult to predict what will happen. Assuming pricing stays the same, the cost to purchase coverage under Scenario 1 would be $3,772 per year. In Scenario 2, where the insured’s are evaluating whether or not they should wait 10-years to purchase coverage, the annual premium (based on today’s rates) would be $10,000 per year.
In Scenario 1, the insured’s would have paid just under $38,000 in long term care insurance premiums before premium payments would even begin under Scenario 2. However, by year 15, under Scenario 1, the insured’s would have paid $56,580, while under Scenario 2 they would have paid $50,000. The breakeven occurs in Year 16. By year 20 the insured’s would have paid $100,000 under Scenario 2, and only $75,440 under Scenario 1.
What does all of this mean? Based on the above example it makes more economic sense to obtain coverage today. Most people don’t know when the need for long term care services will arise. Insurance companies will not issue coverage to an individual who is already receiving care. Not only will the costs of long term care services continue to rise over time, but so too will the costs of insurance premiums.
Many advisors have written and discussed the importance of obtaining coverage while the applicant is still young and healthy. Unfortunately, the reason many people don’t secure coverage early on can be the result of budgetary constraints. If this is the case, adjustments can be made to the design of a policy to reduce the cost. However, when taking this step you must prioritize what is most important to your particular situation.
The information provided in this post is informational, and is intended to assist consumers in having a general understanding of the topic discussed. This information should not be relied upon for purposes of determining what the actual cost or policy will be that suits any one person’s needs.
