October 30, 2014

Is Long Term Insurance Worth the Cost?

Buying long-term care insurance could do you more retirement planning harm than good, says actuary Anna Rappaport, chair of the Committee on Post-Retirement Needs and Risk for the Society of Actuaries and key author of a new study on retirement security.

Long-term care insurance is expensive, and the likelihood you’ll need it for a significant period of time is relatively low. Rappaport says that in the case of couples who made an average income before retirement — about $60,000 a year — and who retire with less than $100,000 in savings, buying long-term care insurance could reduce their standard of living and leave them vulnerable to minor financial shocks — a leaky roof or a damaged car. And it could increase the likelihood they will outlive their money.
On the other side of the slate are couples whose incomes before retirement were greater than $150,000 a year and who retired with more than $500,000 in savings. These couples can afford to purchase long-term care insurance without seriously reducing their standard of living — but the purchase, Rappaport believes, may not add sufficient financial stability over the long run to be worth the money. In a pinch, they could pay the bill without the help of insurance.

The people most likely to benefit from the purchase of long-term care insurance are those in the middle — $105,000 a year in salary before retirement and about $250,000 in savings. But even in those cases, she recommends that couples consider insuring only the wives. Research suggests that while women live longer than men, those extra years are unlikely to be healthy ones, she says. Buying long-term care insurance for this woman who will probably be widowed and is likely to have health care needs makes good sense in many cases.

“It’s not a perfect solution — there isn’t a perfect solution. You have to make trade-offs. But insuring the wife may be a very good trade-off,” Rappaport says.