Is your long term care insurance actually worth it?

Is my long term care insurance actually worth it?

This is perhaps one of the top questions I get from our new clients.

Most recently it came from one of my younger clients. I will call her Michelle for this newsletter.

Just for context, Michelle was able to get this benefit (FLTCIP) from the federal government before it was frozen for new applicants.

Her policy offers a maximum lifetime LTC benefit of around $380,500 today, with a compound inflation rider of 4%.

Her monthly premium is "only" $230 which is mostly because she applied for the policy in her late thirties.

It’s undeniable that having this benefit makes Michelle's overall financial plan stronger.

But given her age and presumably decades of anticipated premium payments, she wanted to know if this is truly a good choice for her.

In other words, what if Michelle simply created a "long term care" investment account and invested the premiums instead?

Now, I absolutely understand that investments and insurance are separate products and there are immediate issues with head to head comparisons.

You invest to increase your net worth.

You buy insurance to protect what you already have.

But to address Michelle's question, I thought it would be interesting to calculate what she would be leaving on the table, so to speak, by continuing to make premium payments.

So this leads to the key question.

Could Michelle's premiums be used more effectively?

Here are the assumptions we used.

Michelle is still quite young, so we looked at a 40-year time horizon before she would likely need care (at least statistically speaking).

For the investment side, we used a 10% annual return, which is on the aggressive side but reasonable for a stock-heavy portfolio.

We assumed 3% inflation for the entire period.

We also assumed her premium would go up by 4% annually. This is actually conservative since FLTCIP has a history of periodic increases that have reached double digit percentages.

Here is how it played out

If Michelle invested those premiums instead of paying them, she would end up with roughly $571,000 in today's dollars after 40 years.

Now compare that to her policy.

Her $380,500 benefit does not stay at the same amount. The 4% compound inflation rider means it grows every single year.

Over 40 years, that benefit grows to approximately $560,000 in today's dollars.

So the two options are essentially a tie in Michelle's case.

The difference is about $11,000 over four decades which is a rounding error in this kind of analysis.

I will tell you, this is not what I expected when we started running the numbers!

Power of flexibility

Since the math came out essentially even, the decision boiled down to personal preferences.

Here is what the investing option offers that insurance cannot.

If Michelle invests the premiums and never needs care, that money is still hers.

If her situation changes entirely and she wants to use the money for something else, she can.

None of that flexibility exists with this type of insurance policy.

Research shows that somewhere between 30% and 50% of LTC policyholders never file a claim.

Some never need the care, some cannot qualify to use it and some pass away before the waiting period is over.

On top of that, roughly 25% of policyholders let their policies lapse before death and forfeit everything they paid in.

These numbers are not pleasant to look at, but they are facts worth considering when you are making your decisions.

What Michelle decided

After going through all of this, Michelle decided to keep the policy.

The math being a wash was actually what made the decision easier.

She was already leaning toward keeping the policy but wanted to confirm she was not making a bad decision.

So the exercise itself was worth doing.

Michelle now understands exactly what she is paying for and why it makes sense for her situation.

This is very different from keeping a policy simply because she has always had it.

What does this mean for you?

Long term care insurance can be an important part of a comprehensive financial plan.

The point of this newsletter is not to talk you into or out of coverage.

I wanted to give you the real math behind one of these decisions so that you would potentially think about taking a similar approach yourself.

For some people, the peace of mind of transferring that risk to an insurance company is worth every penny.

For others, self-funding offers greater growth, total control and zero risk of "use it or lose it."

The last thing you want to do is make this decision based on fear or habit.

And as always, this is not investment advice. I just wanted to help you understand the pros and cons of making certain decisions.

If you have questions about your own long term care needs, please feel free to reach out.