You’ve already thought about the reasons why you might want to purchase long-term care insurance, but now you face another really challenging question: when should you actually buy it?
Since the premiums can be very expensive, many people put off the purchase decision for a long time, figuring they can always purchase later. Unfortunately, because of the way long-term care insurance premiums are priced according to the age at which you purchase, waiting too long could have you paying more premiums in the long run (plus you have to live without coverage in case something happens to you).
Most financial advisors will recommend people purchase long-term care policies between the ages of 50 and 65 in order to “lock in” lower premiums. However, 15 years is a pretty wide gap! How should you decide whether to purchase at 50 or push the limit until you’re 65?
In this post I’m going to walk through some different models of long-term care insurance premium and payment assumptions to examine how the choice of when to start a long-term care insurance policy can affect the size of premiums and the total amount of premiums paid over your lifetime.
The model
This blog post is going to get a bit into the financial weeds, but hopefully you find it helpful. If you just want the summary, you can skip to the bottom of the post.
For the inputs to this model, I’m using Genworth’s policy premium calculator — it’s important to note that all of these premiums are purely illustrative and you will have to talk to an agent (or join Bolster) to get a personalized quote.
There’s a few things we want to account for:
- How the premium cost changes with age
- The “opportunity cost” of paying premiums (instead of investing that money and earning a return)
- How long the person will be paying the premiums for (i.e., their life expectancy from when they purchase the policy).
We constructed a model of the total cost of the policy (including the opportunity cost of premiums potentially saved) in order to better understand how one might make the decision.
The results
The results of the model were a bit surprising to me: the most important factor impacting the timing of when you should buy long-term care insurance is your life expectancy. This is because your life expectancy determines how long you’ll be paying the premiums for — so if you think you’re going to live for a very long time, then “locking in” a lower premium rate is a good deal. However, if you don’t expect to live for very long then it may make more sense to delay the long-term care purchase so that you can save the premiums.
Using the premiums from the Genworth calculator for a male in Arizona, our model says that the best age to buy long-term care insurance is age 65 assuming a total life expectancy of 90 years. However, if with an assumed life expectancy of 80 years, it makes sense to delay the purchase of long-term care insurance as long as possible.
Model results assuming a life expectancy of 90
Unfortunately, none of us know today how long we’ll actually live. If we use the actuarial life tables provided by the Social Security Administration we get similar results, with the optimal age to buy between the ages of 65 and 70.
If you want to play with the model yourself, you can make a copy of the workbook here.
So should I wait to purchase?
Probably not.
Our model is conservative in a number of ways that make us believe that the optimal time to buy for most people will be between the ages of 60 and 65. Here are the reasons:
- If you delay purchasing long-term care insurance, you could have a health event that makes you uninsurable or will make your costs significantly higher than what is assumed in the model. Every year you delay purchasing long-term care insurance is another year you’re exposed to the risk of something happening that could impact your ability to purchase long-term care insurance at all
- We’re assuming that all of the premium amounts that would be put into long-term care insurance premiums goes into savings. This is not actually a very good assumption because people are not actually that good at saving — when life events come up people often prioritize taking the vacation to see the grandkids rather than saving the money for their potential future long-term care needs. A long-term care insurance premium acts as a “forced savings” mechanism for many people.
- While you’re waiting, you won’t actually be insured! While some people may believe that the risk of needing long-term care is low in their 60s, it’s not uncommon for early-onset dementia and Alzheimer’s disease to begin showing symptoms before age 70
Ready to get started?