Long-Term Care Insurance

Long-term care insurance is conceptually more like whole life insurance than health insurance. Health insurance is for a fixed term (usually the month in which the insurance is purchased) and it covers necessary medical care during that time as well as any ongoing expenses related to that episode in which care is needed. Long-term care insurance, on the other hand, provides for a fixed payment toward long-term care services once long-term care is needed. There are specific triggers, which are often tied to measures of activities of daily living or ADLS. But the amount of the benefit is most often tied to the site of care and not the level of functional disability. Moreover, the amount of benefit is predetermined by the consumer, for example, $100/day for a nursing home stay and $50/day for care at home. Most policies offer consumers the option to allow the benefit amount to increase with inflation, but often the inflation index is either a fixed percentage (for example, 5 percent) or tied to general inflation and not necessarily the increase in the cost of long-term care.

The price of the policy depends on the options chosen and the age at which the policy is initially purchased. This age at which the policy was first purchased determines the price of the policy for as long as the policy is held. Assuming a 5 percent compounded inflation benefit and a nonforfiture benefit, a policy purchased at age forty, for example, might cost $770 a year; while the same policy initially purchased at age sixty-five would cost $2,305 a year (Chart III-13 in Congressional Research Services Long-Term Care Chartbook, 2000). If bought at age forty, the premium will be one-third of what it will cost if the individual waits until age sixty-five to begin buying the policy with the same benefits. This significant price difference arises because the forty year old has a significantly lower risk of needing long-term care in the short-run and because of the longer period in which premium payments on the part of the forty year old will grow.

For example, let's assume a forty-year-old and a sixty-five-year-old buy the same long-term care policy. Further assume that they maintain the policy and that they both need nursing home care at age eighty-five. This will be twenty years for the sixty-five year old and forty-five years for the forty year old. Over the course of the forty-five years the forty year old will have paid $26,950 in long-term care insurance premiums. Over the course of the twenty years, the sixty-five year old will have paid $46,100 in long-term care insurance premiums, for the same benefit.

Although the forty year old will have paid less, the value of the premiums to the insurance company will be worth more. Take for example the first year's premium. The forty year old paid $770 and the sixty-five year old paid $2,305. When the forty year old is eight-five, that initial premium will have grown in tax-free investments held by the insurance company—assuming an 8 percent rate of return—to be worth $27,845, while the first year premium paid by the sixty-five year old will only be worth $11,356 to the insurance company.