I recently talked with a couple in their early 50s, and their questions were centered around long-term care insurance. It was odd yet refreshing to see a couple interested in making plans for a distant future. More often I’m finding that younger people are a lot more concerned with long-term care needs because of increased media coverage and their personal experiences with addressing these issues with their parents.
These clients were interested in looking at their options. While there are many more options available in the marketplace today than there were even three years ago, it also can be confusing. So, we began by identifying the real financial risk of needing care at some point in the future and then determine how much they want to self-insure vs. how much risk to push off to the insurance company. For a couple, the biggest risk is if one person suddenly needs extended care, which introduces new costs, while the other person maintains all of their originally planned financial commitments.
I also look at the cost of care today, consider the typical age when a long-term care event usually happens, and then factor in historical inflation to determine what a policy will pay toward the cost of care in the future. Benefits should generally be in line with where the cost of care will be when it is needed.
There is a real benefit to obtaining long-term care policies early. Statistically speaking, the average long-term claim begins at age 80. Using that as a benchmark, the closer you get to that age, the more expensive policies become. Likewise, the further you pull back from age 80, the lower the premium you should be able to get. Generally speaking, I have seen a meaningful cost difference roughly every five years a person waits. At age 55, a one could expect to see a 10% to 15% increase, and by age 60, one might see a 28% to 32% increase. As a person approaches age 80, policies can become cost prohibitive. Furthermore, as you age, medical issues can increase, potentially limiting your eligibility for coverage.
With these clients being in their early 50s, premiums for long-term care insurance were very affordable; however, they were very concerned that they might have a premium increase down the line as they saw their own parents’ policy premiums increase.
Interest rates have a big effect on insurance premiums. Most insurance companies make around half their income off their bond portfolio, and when rates are low, it is hard for them to be as profitable as they once were. With interest rates today, the most likely outcome is that interest rates will rise, which will benefit insurance companies. Policy purchasers today will likely never see their premiums decrease, but it is not likely they will see an increase either. Policies placed 10 or 20 years ago likely saw increased premiums because interest rates fell, and companies were not able to make the money they needed off their bond portfolios.
If you are in your 50s, consider taking the time to talk to a trusted insurance agent about your options for long-term care. The interest rate environment today may work to your advantage.