The 5% Income Limit
Given the wide range of policies, there is no one-size-fits-all rule for when LTC insurance is appropriate. However, some consumer and financial experts advise against buying LTCI unless you can afford to pay the monthly premium with no more than 5% of your income.
When calculating this 5% figure for future years, keep in mind that your premiums are likely to rise at least slightly over the life of the policy, while your income will most likely drop at some point—for many people, when they formally “retire.”
When do people decide to purchase long-term care insurance?
When it comes to buying LTC insurance, there is a sweet spot. If you buy it too young, your premiums will be lower, but you will have to pay them for a very long time.
Most people before their fifties are also unable to predict their finances and health in sufficient detail to make an informed decision. However, if you buy LTC insurance after a certain age, your premiums will be so high that LTC insurance will become unaffordable. Your chances of being denied coverage increase as you get older. Most people in their fifties and sixties purchase long-term care insurance.
Long-Term Care Insurance Past Performance
Knowing the history of long-term care insurance is beneficial. LTC insurance policies (such as those sold in the 1990s) have historically performed quite poorly:
Approximately half of all LTC policies lapsed before any benefits were paid because policyholders were unable or unwilling to pay their premiums.
Approximately half of those who purchased insurance and later entered a nursing facility never received a penny from their LTC policies.
Many people who purchased nursing facility coverage but instead received home care or entered a residential facility not covered by the insurance received no benefits. LTC benefits were usually far below the actual cost of care by the time they were paid (which rose astronomically over the last few decades).
Many of the longest-term residents had their benefits exhausted before their stay in the nursing home.
In these cases, LTC insurance fell short of its promise of preventing people from depleting their savings or relying on Medicaid to pay for long-term care. In other words, it was a waste of money.
