A Reddit poster with millions saved asked recently whether he should buy long-term care insurance in his 40s. His thinking was that he’d get cheaper premiums if he bought coverage now, and would have flexibility with financial planning since he’d spread out the cost of long-term care coverage over many years instead of having to pay it all at once as a senior.
So, should he buy the insurance?
Is buying long-term care insurance a smart financial move?
There is clearly an argument to be made that you should have a plan in case you need long-term care. There is a 70% chance of needing long-term care after reaching age 65, and the Genworth Cost of Care survey shows that a private room in a nursing home has an average price of $9,733 per month.
Even with millions of dollars, that’s a lot of money to spend on a nursing home. While you could afford the cost out of your savings if you have a seven-figure nest egg, you may not want to spend down all you worked for just because you happen to need care. Unfortunately, Medicare and private insurance almost never cover nursing homes, so high care bills are a very real possibility as you age.
However, buying long-term care insurance in your 40s is not necessarily the right solution for this. You could get stuck paying high premiums for decades during which the chances of needing custodial care are low, and many long-term policies also aren’t great and have things like low daily limits that make actually using coverage hard.
What should you do instead of buying long-term care insurance?
One option is to have dedicated savings in a health savings account that you earmark for things like medical and long-term care in your senior years. If you plan for this account to cover nursing home care, you’d need a substantial amount of money invested. Since HSAs allow you to contribute with pre-tax money and make tax-free withdrawals for qualifying medical expenses, these tax breaks do mean you won’t need to save quite as much as you would in a regular investment account.
Another option is to work with an estate planning attorney to make a Medicaid plan. Medicaid does cover nursing home care but the key is that you’re only eligible if you have very limited financial means. If you have too many assets, you would have to spend them and impoverish yourself before Medicaid would start paying your care bills. But if you work with an attorney and make a plan to shield your assets while qualifying for Medicaid, you can avoid this and qualify for coverage sooner.
Remember, you pay taxes for Medicaid throughout your working life, so if you want to make a Medicaid plan in case you must go into a nursing home, you’d be trying to make a program work for you that you supported over your career. You could avoid long-term care premiums and avoid getting stuck with a bad policy, while also making sure your loved ones don’t lose their inheritance because of nursing home care bills.
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