My wife and I bought long-term care policies 25 years ago, when they were relatively affordable. Now, our premiums have increased for the third time to more than $500 per month and will increase again in six years. I think I’ve already paid about $72,000 in premiums. Now, in our late 70s, I’m trying to decide whether I should accept the hike or cancel the policies. What do you think?
No one likes paying higher premiums and watching them increase can be frustrating. However, just like when you initially decided to purchase a policy, the issue is still whether you need the coverage and whether you can afford it. (And if you need help planning your long-term care or saving for future expenses, consider talking to a financial advisor.)
sunk cost of past premium
Before we address the question directly, let’s talk about the $72,000 you’ve paid so far. I’m not sure if you’re suggesting you should keep going or stop because you’ve already spent so much, but it shouldn’t affect your decision either way. Those pre-premiums are sunk costs, and the insurance coverage they purchased for you is in the past. It’s no different than the $10 you spent on lunch yesterday.
value of insurance going forward
The real question is whether or not you still need long-term care insurance, and whether the coverage provided by your policy is worth the $500+ per month.
I think there are two big concepts at play here that you should consider when thinking about your decision: your age as well as your resources and goals.
Your age
The first is your age and your likelihood of needing long-term care. It’s a few years old, but this article from Morningstar discusses some relevant long-term care statistics that I think reflect what we all intuitively know. As we age, our chances of needing long-term care increase. Data from 2018 shows the percentage of people who need long-term care:
- 8% of people are between 65 and 74 years old
- 17% of people are between 75 and 84 years old
- 42% people 85+
So, unlike the premiums you have already paid, the days are ahead of you when you are more likely to experience the need for long-term care. (A financial advisor can help you prepare for future expenses such as long-term care.)
Your resources and goals
Although it certainly speaks to this, the fact that you are more likely to need long-term care in the future does not mean you need long-term care insurance.
Depending on how your investments have performed and how much you’ve spent during your retirement (assuming you’re retired, you might not be) your account could grow so large that it self-depletes. It makes sense to have insurance. Of course, I don’t know this, just pointing out that it’s possible. If it hasn’t, your decision is very simple in my opinion. Provided you can continue paying the premiums it is probably best that you do so.
Even if you can reasonably insure yourself, you’ll still want to think about what you hope to do with your savings. Just because you can self-insure doesn’t mean you should or should. Long-term care insurance can help you protect all of your assets from being depleted, which in turn provides some protection for any money you hope to leave to your heirs. This alone may make it worthwhile for you depending on your financial goals. (And if you need help setting and planning financial goals, such as passing on assets to heirs, talk to a financial advisor.)
ground level
I think there’s a good chance that it’s still advisable to keep your long-term care policy, but take what we’ve discussed above as a starting point for evaluating your situation. See if the new premiums fit your budget and help you meet your goals. Assuming they do, maintaining your policy may be the best option.
Tips for Finding a Financial Advisor
- Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with three verified financial advisors serving your area, and you can have a free introductory call with one of their advisors so you can decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before deciding on one. It is important to make sure that you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to make sure you’re making the right choice.
Brandon Renfrow, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions on personal finance and tax topics. Do you have a question you’d like answered? Email [email protected] and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform, and has been compensated for this article.
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