When Is the Right Time to Purchase Long-Term Care Insurance?

Question: My husband and I are in our early 50s with no kids. We'd like to purchase long-term care insurance but wrestle with the right time to do so. I know it's cheaper to buy a policy when you're younger, but my hope is not to need this coverage for another 30 years, if at all. Any guidance?

Answer: With nursing home care averaging $200 a day in 2008, according to  MetLife  (MET) (and skilled home health care or nursing care at higher-end facilities or in high-cost geographies costing a lot more than that), you're wise to contemplate a purchase of long-term care insurance. But you've hit on one of the crucial questions: When is the time to buy it?

Much like the questions surrounding when to begin collecting Social Security benefits, timing a long-term care insurance purchase is more art than science and involves guessing about your own health and future.

Insurance professionals often push long-term care coverage at an early age--no surprise there. The benefit to you is that the premiums are certainly lower than if you waited, and being younger reduces the likelihood that you would have already encountered a serious health problem that could jack up your premiums or disqualify you for coverage. (You'll typically be required to take a physical to obtain coverage.) A Consumer Reports study found that 23% of people who applied for long-term care coverage while in their 60s were denied it, while 45% of those in their 70s didn't pass the physical. So clearly, waiting too long to purchase a long-term care policy can backfire. And if you have a serious medical condition that runs in your family, that's an extra incentive to consider purchasing long-term care insurance pre-emptively, while you're in good health.

But as alluded to in the question above, the average age for entering a nursing home is roughly 80. So, if you buy a policy now, you could be paying premiums for 25 years or more before you actually use the coverage. The question is, what's the opportunity cost of sending that money to an insurer rather than holding on to those premiums for another decade and purchasing a policy then?

Let's look at some numbers. The average annual premium for long-term care insurance for someone in their 50s was roughly $2,000 in 2008, according to LIMRA International, versus an average annual premium of $2,250 for a person age 60 to 64. (Those statistics encompass a broad range of purchasers and policy types.) If a person who's 52 now held off on buying a policy until he was 62 and invested that $2,000 per year instead, he'd have amassed $24,000 by age 62, assuming a 4% return on his money. Thus, purchasing now versus holding off carries a sizable opportunity cost.

But while it may seem like waiting is a no-brainer, it's worth noting that my example bakes in some assumptions. The big one is that the individual would still qualify for coverage--a big if--10 years later. And long-term care premiums, like almost everything else, are likely to inflate over time. So by the time he got around to buying the insurance at age 62, it's very likely that his premiums would be much higher than $2,250 a year. (The two policy premium averages cited above--$2,000 for a 52-year-old and $2,250 for a 62-year-old--are as of the same date.)

As you weigh the pros and cons of purchasing now versus waiting until later, ask your insurance provider to price coverage for someone at your current age as well as for someone who's five or 10 years older; that will help you determine how much you're saving by starting earlier. For most people, initiating long-term care coverage in their early 60s strikes the right balance.

And though your age is the key factor in determining when to purchase coverage, also bear in mind the effect that prevailing interest rates have on the pricing of these policies. Insurance companies pay claims with a combination of premiums and the interest they earn on those premiums. With interest rates on conservative investments as low as they are now, it's probably a pricey time to buy a policy.

One other factor that might play a role in your decision-making is the introduction of the CLASS Act, which I detailed in this article. The specifics of this program and how it will work are still unfolding, but if you're in your early 50s, it may be worth waiting for further details to see if you can use CLASS coverage to augment a private long-term care policy.

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