It is difficult for many people to evaluate this decision. Guessing or trying to balance the different unknowns is not a good approach. A good decision framework was developed by Advisor Insurance Resources (AIR), which works with fee-only financial planners to analyze various insurance products for consumers. AIR identified the key factors to consider and quantified their effects using assumptions and historic data. AIR says there are four key assumptions to consider. An overlooked assumption is that insurers often introduce new products, usually every three to five years, and the product revisions affect the cost. The new policies generally have effective premium increases of about 3% over the previous generation of policies. The increases often are required because the insurers underpriced their past policies and paid higher claims than anticipated. Cost increases also can be indirect, through lower basic benefits for the same premiums. Insureds buying the new policies have to choose higher cost riders and options to receive the same coverage as the previous generation’s basic policy. Another assumption is the benefit limit of the policy. If a policy is purchased later instead of sooner, the benefit amount must be higher to keep pace with inflation of the covered expenses. In other words, $3,000 of monthly coverage today might be the equivalent of $3,800 per month in five years. That translates again into higher premiums for waiting. The third assumption is what is done with the money that would have gone to premiums when the policy purchase is deferred. You might want to assume it is invested. AIR assumed a 5% after-tax annual return in its analysis. Another assumption is how long you will keep paying premiums. The main choices are until ages 80 and 90. Each assumption makes a difference in the results. Let's look at a few conclusions that can be drawn from the framework developed by AIR, which is available on their web site at www.AdvisorInsuranceResource.com. If you assume premiums are paid to age 80, at almost any age it is cheaper to buy the policy now instead of five years from now. But it is even cheaper to wait at least 10 years to buy. The cost is measured by how much the policy costs over a lifetime. A major factor in the calculations is your current age, especially if you assume premiums are paid until 90. If you assume premiums are paid to age 90 and you are younger than 60, it is cheaper to buy either now or 15 years or more from now. After age 60, at every age level it is more expensive to wait to purchase if you pay premiums until 90. The key variable, which cannot be quantified, is insurability. An accident or decline in your health could make you uninsurable at any time. The ideal strategy, as the numbers show, would be to delay the purchase until just a few years before you need the benefits. But you are unlikely to be able to time the purchase that way, and becoming uninsurable in the meantime would have expensive consequences. You would have to pay for all the long-term care yourself, because insurance would not be available. Another important factor is that, under this analysis, waiting to purchase is cheaper because of the assumption that the money that would have gone to premiums is invested to earn an after-tax 5% return. The compounded savings offset the higher premiums at later ages. If you do not invest the money that would have gone to premiums or earn a lower return, waiting to purchase LTCI is not the better financial move. Buying early also eliminates the risk future policies will be less generous. Long-term care insurance still is a fairly new product, and insurers do not have sufficient data to make good projections about the claims they will pay. Many insurers entered the field the last few decades only to drop out after claims far exceeded their estimate. As the Baby Boomers age, if they use long-term care more than the insurers forecast, future policies could be issued with restricted coverage or much higher premiums. Another advantage of an early purchase is eliminating the risk that premium increases will be much higher than in the past. This analysis involves only straight long-term care insurance, not policies that combine LTCI with life insurance or annuities or that guarantee return of premiums. Those features substantially increase the cost and make it hard to analyze and compare policies. The conclusion you should draw from this analysis is the safest route is to buy coverage sooner rather than later. Otherwise, all the assumptions in favor of delaying the purchase must be accurate for you to come out ahead, especially the assumption that you are insurable at the later date. The risks to buying early are you pay many years of premiums before making a claim or never make a claim under the policy. This is the same risk you hope will be true for homeowner’s and auto insurance, and long-term care insurance should be viewed the same way.
© 2003 - 2012 Retirement Watch, L.L.C.
| ||||||||||||||||
Advice: Health Care
|
1-800-552-1152 |
Monday-Friday: 9:00AM-5:30PM (ET) | info@retirementwatch.com |
