Long-term care costs can devastate a family's financial well-being if not appropriately planned for. One way to plan is to purchase long-term care insurance, but premium costs can be a financial burden for middle-income families. What if you took the same money you would pay for premiums and invested it yourself '“ that is, what if you self-insured for the possibility of requiring long-term care?
Researchers at the University of Southern Maine conducted a study to determine just how financially desirable long-term care insurance is compared with self-insuring. Specifically, they looked at the financial feasibility of making annual insurance payments to cover nursing home care for up to $4,000 a month for a maximum of five years. They estimated these payments to be $1,190 for someone beginning to pay at age 40, $1,867 for an individual starting at age 55, and $3,322 for someone starting at age 65. The researchers compared the purchase of insurance with the opportunity cost of investing the required funds at three different rates of return.
Although the results varied depending on how the average length of a nursing home stay was determined, the researchers found that in general long-term care insurance appears to be "quite desirable" for women but only moderately so for men. This is because men pay the same premiums but have a lower probability of needing nursing home care and have shorter average stays than do women. The greater the return on investment, the more desirable self-insuring became for men. And the study concluded that self-insuring is the more desirable alternative for older men (age 65) at any of the three levels of investment return.
The researchers note that substituting higher 2006 premium quotes made the purchase of long-term care insurance even less desirable for some males. But they also cautioned that their analysis did not account for tax breaks that purchasers of long-term care insurance would receive. Critics of the study have also pointed out that it focuses on nursing home care. Much care is provided at home or in assisted living facilities, which can be covered under many modern long-term care insurance policies.
The study appears in the online edition of the Journal of Financial Planning. To read the full text, click here.
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