Commentary today from Littleton Colorado inspired me to write an article going over various perspectives as to whether long-term care insurance is a good investment.  Let’s start off by saying that your investment needs as an individual are unique and you should consult a licensed financial advisor before making investment decisions.

In fact, insurance is never an investment in the classical sense of the word.  Insurance may pay off when you need it, but should not be looked at as an alternative to investment.  Insurance is almost a necessary evil in a world filled with risk.  In the case of long-term care insurance, the risk is that you may need a huge amount of care in the future, costing millions of dollars.  for many Americans, the spector of a $1 million long-term care bill could be ruinous.  Thus, the LTC insurance business has stepped in to pool the risk and make it more pallatable for the average American to have a plan for long-term care.

Long-term care is not inevitable.  There are many reasons people die without ever needing care.  But for a large percentage of people, needing care is a necessity in the later stages of life.  Alzheimers currently stands out as the largest threat for many, so if you have a history of Alzheimers in your family, you may want to pay close attention to LTC insurance.

So, How Does Insurance Compare to Investments?

Here’s an outtake from that article I mentioned earlier.  They do a good job of describing the social safety net that insurance is designed to create.

Insurance regulators require that insurance companies put aside money (called “reserves”) to help make sure that future claims can be paid.  With many types of insurance, including long-term care insurance, these reserve requirements are one of the major reasons why the insurer doesn’t make a profit when a policy is first sold.  But just setting reserve requirements isn’t enough:  regulators also restrict how these reserves can be invested, to minimize the chance that aggressive investing could hurt the value of reserves, and potentially jeopardize claims paying.  It’s important that policyholders understand that their insurance contract is backed by more than just the promise and goodwill of an insurer.  There is actually money put aside to make sure claims can be paid.

What if the worst case happens, and an insurer becomes insolvent or is unable to pay its claims?  Enter the state’s guaranty fund.  Insurance contracts are regulated by the Division of Insurance (DOI) in the state where the contract was originated.  For an individual policy, it is the DOI in the state where the contract was written; for a group policy, it is the state where the master certificate originates.

So, as you can see, insurance is well capitalized relative to what many in the public believe.  Even AIG, the huge insurer that created headlines in 2008 and 2009, has reserves to pay property and casualty claims.

This entry was posted on Tuesday, March 3rd, 2009 at 7:57 pm and is filed under Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.