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.

It is a question that deserves an honest answer, and dialogue.  When should you look seriously at long-term care insurance?  And should you even look?  What got me thinking about this was an article on the US News and Report blog about the topic here.

Should You Buy Long Term Care Insurance At All?

It depends on your net worth.  Consumer Reports suggests that folks with $200,000 to $2 million in net worth are a good fit for long term care.  The wisdom on the street, where I spend my days, suggests it is more like folks with $50,000 and up considering long-term care insurance.  The peace of mind one gets from having an LTC policy cannot be ignored, nor can the costs of premiums.  At CoverageNet, we tailor long term care policies to fit a variety of budgets.  Another Long-Term care brokerage, LTCtree, has served thousands of clients in making long term care insurance decisions and advises some good ways to save on long term care insurance premiums.  The bottom line is, don’t put yourself in a box when considering long-term care insurance.

Back To Age: When’s The Best Age To Apply?

The year before you need the policy is the best time to apply, assuming you can qualify.  I jest, but the fact is, long-term care insurance is something that should be considered when you are at the peak of good health.  The difference between being insurable and not is only a doctor’s visit away.  The general rule is that the 50’s are a good time to look, though more and more people are buying as early as their late 30’s.

Indeed, Health is Key.

If you look at the numbers, you’ll find that waiting five years, premiums may increase only 20%.  However, the differences in health will raise your rates anywhere from 10% to 70%.  In fact, the highest rate classes are cost prohibitive to the point where very few applicants take a policy once placed in the lower rate classes.

You Know Your Family History Best

The best place to make decisions about long-term care insurance is at the family reunion.  Look at your relatives.  Do they play golf into their 90s, or is the family reunion actually held at the assisted living facility?