Does Long-Term-Care Insurance Add Up?

“We’ve been paying into long-term-care insurance since we were in our mid-50s,” said a friend, now in her late 60s. “But with all of the premium increases, we might have been better off just investing the money.”

A lot of older adults have concluded that forgoing long-term-care insurance is the way to go. Once the standard prescription for addressing long-term-care risk, pure long-term-care insurance has become a niche product. The insurance trade association LIMRA estimates that just 3% to 4% of people over age 50 have long-term-care insurance today, and private long-term-care insurance covers just 5% of the long-term-care expenses being incurred in the US. (Medicaid is the biggest payer of long-term-care costs, covering 42% of all long-term-care expenses in 2022.)

The fading popularity of long-term-care insurance likely owes to a few key factors: rising premiums, horror stories from families who have had to haggle with insurance companies to pay claims, and rising portfolio values, which have led many older adults to plan to self-fund long-term care instead.

The question is, should anyone consider long-term-care insurance, and when should they buy it?

The Why of Insurance

Before going any further, it’s important to note that long-term-care insurance offers a few key benefits that paying long-term-care expenses out of your own portfolio can’t match.

The first is that, in contrast to building up your fund for long-term-care expenses, insurance would begin paying from the get-go. While most people don’t develop a long-term-care need until they’re in their early to mid-80s, which theoretically gives self-funders the opportunity to see their money compound, encountering disabling conditions earlier isn’t out of the question. The person who has an active long-term-care insurance policy can obtain coverage whenever it is needed.

In addition, insurance provides at least some protection against an extended long-term-care need, whereas it would be difficult to amass a “self-fund” of that size. However, that’s not as great an advantage of insurance as it once was. Whereas policies with lifetime benefits were once readily available, and many are still in force, today most policies will only cover care for three to five years and/or have a dollar limit on how much they’ll pay out over the insured individual’s lifetime.

Finally, arguably the biggest advantage of long-term-care insurance coverage is peace of mind. Knowing that you have a policy in place, you might feel more comfortable spending from your portfolio because there’s less of a risk of having a large outlay later on. Having a policy may also help alleviate the worry of being an undue burden on children or other family members to care for you. In my book How to Retire, financial planner and medical doctor Carolyn McClanahan called that one of the biggest selling points of long-term-care insurance. Whereas children might be disinclined to pay for care if it means turning to their parents’ portfolio (and spending down their inheritances), she has found that isn’t an issue if there’s a long-term-care policy in place.

State of the Industry

But there are plenty of negatives about long-term-care insurance. One overarching issue is that insurers priced early long-term-care policies too low. Their claims experience was worse than expected because of longevity (the older you are, the more likely you are to experience health conditions that require long-term care), policyholders hung on even when insurers hiked premiums, and interest rates stayed stubbornly low from the 1990s through the early 2020s, meaning that insurers couldn’t earn much interest on customers’ premiums. Additionally, the cost of providing long-term care has simply gotten more expensive, largely because of labor costs. (That trend shows no sign of reversing.)

The net effect of this negative confluence of events is that fewer and fewer insurance companies want to be in the business of providing long-term-care insurance. Whereas more than 100 companies offered long-term-care insurance in the products’ heyday in the 1990s, today only six companies offer pure long-term-care insurance. Instead, more companies are offering hybrid products that combine an annuity or life insurance with a long-term-care rider. I’ll discuss those products in a future article.

Rarely is that kind of consolidation good for consumers. Premiums on new policies have escalated to make the products financially viable for insurers, and insurance companies have also pushed through premium increases on existing policyholders. State insurance regulators must sign off on premium increases, so the data on approved premium increases is inherently diffuse. However, a survey from the Society of Actuaries found that the average approved premium increase in 2024 was 28%, in line with the 29% average approved increase in the 2021 survey. That doesn’t mean that every insurer hiked premiums on all of its policies in that year; that’s only the increase for policies that applied for and were granted increases by state regulators. And insurers typically offer their policyholders the option to reduce their benefits in some fashion rather than accepting the premium increase and maintaining existing coverage. In the 2024 survey, 12% of policyholders facing premium increases opted to reduce their benefits instead.

There are a couple of positives that could stabilize the long-term-care market, however. One is that the interest rate environment is more favorable for insurers today than it was a few years ago. Thanks to higher fixed-income yields, insurance companies can now earn a decent rate of return on their safe investments, whereas yields were negative on an inflation-adjusted basis through 2020. Insurers also have more claims data at their disposal than they did when the long-term-care insurance industry was in its infancy, so actuaries can help them be more realistic about the claims they might receive and for how long. In other words, new policies are apt to be priced much more realistically than they were a few decades ago.

Who Should Buy and When

Given those conditions, is a long-term-care policy the right answer for anyone? Possibly. As I’ve written before, a good starting point is to analyze which of the three major long-term-care situations you fall into. If you have a lot of wealth, such that you could cover at least 2 to 3 years’ worth of care out of pocket without meaningfully affecting your other spending and quality of life, then self-funding is a reasonable way to go. (I’ve written about both how to estimate a reasonable long-term-care fund as well as where and how to invest those funds.) Ditto if you’re willing to liquidate some of your home equity, either by selling outright or via a reverse mortgage, if you encounter a long-term-care need. You can use those funds to augment your long-term-care fund.

At the other extreme, people with very tight retirement plans probably don’t have the funds to cover even a basic long-term-care policy and will need to rely on government resources if they end up needing paid long-term care. As a reference point, the average premium for a long-term-care policy with a (fairly modest) $165,000 initial benefit with an annual 3% inflation adjustment was $2,610 for a 60-year-old man and $4,550 for a 60-year-old woman. Those premiums would be likely to increase over time.

But if you fall between those two extremes, then you are a good candidate for some type of insurance product, either pure long-term-care insurance or a hybrid life/long-term-care policy or annuity/long-term-care policy.

When to buy the insurance is another important consideration. Premiums are lower if you purchase relatively early—say, after 50—but that’s not as good a deal as it seems because you’ll likely have more years of paying into the policy before you need the insurance. You also have extra insurance-company risk if there’s a big time gap between the time you start paying for insurance and when it begins paying out.

However, if you wait too long, it’s possible you’ll encounter a health condition that will disqualify you from purchasing insurance or curtail the amount of insurance you can buy. According to the American Association of Long-Term Care Insurance, 38% of people applying for long-term-care insurance between the ages of 65 and 69 were denied coverage, and 47% of applicants aged 70 and above were denied coverage. Hybrid life/long-term-care policies, which are typically purchased with a lump sum, generally have less stringent underwriting standards than pure long-term-care insurance.