Long-term care insurance is an important way to reduce risk in retirement. Unexpected health problems and related costs can dominate a retiree’s financial life if they do not have a plan to pay for the costs of care. The cost of such a policy will depend on a few factors – including your age and coverage level – so whether you should accept the $2,000 annual premium depends entirely on your personal profile.
If you waited until retirement, this price is much lower. A long-term care insurance policy in your 60s and 70s can cost between $2,000 and $4,500 per year, depending on your different coverage options.
What is long term care insurance?
Long-term care insurance is a policy that pays for ongoing support services.
Often long-term care will require either paying for help in the home, such as a visiting nurse, or living in a medical facility, such as an assisted living or nursing home. Most people need insurance, Medicaid, or some other source of funding to pay for it. Depending on the nature of your services, long-term care can cost between $5,000 and $8,000 per month plus additional expenses.
For many policies, $2,000 is very reasonable
It all returns to our main question, is $2,000 a year a fair price for long-term care insurance?
The answer is, it depends. Returning to data from the American Association for Long-Term Care Insurance, some average policy prices for representative profiles include:
- Age 55, single male, $165,000 coverage, no inflation – $900/year
- Age 55, single female, $165,000 coverage, no inflation – $1,500/year
- Age 55, single male, $165,000 coverage, 2% inflation – $1,650/year
- Age 55, single female, $165,000 coverage, 2% inflation – $2,725
So, let’s say you’re a woman in her 50s who wants a policy that’s adjusted for benchmark inflation. With that profile, $2,000 per month is a good deal. On the other hand, $2,000 per year is somewhat high for a similarly situated person.
If you wait until retirement age the prices are:
- Age 65, single male, $165,000 coverage, no inflation – $1,700/year
- Age 65, single woman, $165,000 coverage, no inflation – $2,700/year
- Age 65, single male, $165,000 coverage, 2% inflation – $2,600/year
- Age 65, single female, $165,000 coverage, 2% inflation – $4,230/year
Here, your $2,000 offer is almost certainly a good deal unless you’re someone who doesn’t want their benefits indexed to inflation, which is probably a bad decision.
Long-term care insurance is an important part of retirement planning. It is expensive, but the care it provides may be necessary. Although it may be difficult to budget for this insurance in retirement, it will be even more difficult to budget for a nursing home.
What determines the price of long-term care insurance?
Long-term care is priced based on the same underlying logic as all health insurance. The more services you need, and the sooner you need them, the higher your premium will be. Some of the most important factors include:
- Your age when you buy the policy
- your life expectancy
- amount of coverage
- inflation adjustment of coverage
- Your state and its health care costs
The sooner you purchase care, the cheaper your premiums will be, because you’ll keep the insurance longer before you need to use it. The longer your life expectancy, the higher your premiums will be because you’ll use more care overall. For this reason, long-term care is generally more expensive for women than for men because women have a longer life expectancy.
Long-term care covers your costs up to a limit, and the higher the coverage limit, the more expensive your policy will be. An average policy provides $165,000 of coverage. For an additional premium, you can have that coverage indexed to inflation. This will increase the coverage at a fixed rate each year so that the policy maintains its affordability.
Inflation adjustment is generally necessary.
Ultimately, your state and territory will determine the cost of your overall care. For example, according to New York Life Insurance, it costs an average of $8,071 to live in an assisted living facility in New York City. The same stay in a rural area of North Dakota would cost $3,179. This will determine the amount of coverage you need, as well as the policy requirements and prices.
Long-term care insurance is expensive, and for many people $2,000 is a pretty good price. Let’s learn how these policies work and what you should pay.
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