Long Term Care Insurance

While long term care insurance is a type of health insurance, it’s one significant enough that it is generally treated separately from normal health insurance. There are a number of reasons for this, not the least of which is the fairly high degree of risk involved to insurance companies as the need for this gets closer.

Since the need for this coverage most often arises very late in life, when one deteriorates from the aging process such that one is no longer able to care for oneself, lacking the ability to do so in a fundamental way, people generally don’t prepare that well for it.

If this is bought at all, it tends to be bought late in life, when the costs are much higher. Younger people simply don’t buy this much and this drives up the cost of this insurance quite a bit. Insurance companies are looking to make money from selling this insurance, as they always do, and always must, and need to match the money they take in with the money they are likely to pay out.

If someone were already of an advanced age and the chances that they would need this coverage in the near future were high, insurance companies would have to charge this person quite a bit in premiums, and perhaps to a degree that they would not be able to even afford it.

In order to make this economical, one really needs to spread the risk out over a longer period of time, so that their premiums over the years could be kept more modest and affordable, and although they would be expected to go up later as the risk increases, the sticker shock so to speak later could be kept more manageable.

At least at the present time, the demand just hasn’t been there, and there simply just aren’t a lot of people that buy this insurance well before the need for it. This is fairly understandable though, as the risk of needing long term care at a younger age simply isn’t that great.

Since the goal of insurance is to protect against risks that people both are concerned about and cannot manage on their own, they need to be concerned about it enough to be willing to fork out the money for it, and this is the part that is lacking pretty much with this type of insurance.

So when it’s reasonably priced, people don’t really want it that much, and when they do, it tends to be expensive, and perhaps even too expensive. Another risk that people face with this is the possibility that they will pay into this for years and later on see their premiums rise to where they can no longer afford it, which would see themselves wasting the money they already sunk into it with no benefit. This is a significant concern actually.

Health Insurance, Unregulated

Health insurance already is misaligned so to speak compared to other types of insurance. For instance, with auto insurance, the risk people present to insurance companies is extremely well scrutinized and risk assessment plays a fundamental role in the pricing of policies.

This tends to be less the case with health insurance though, far less actually, and if it were than a lot of people would have to pay much higher premiums or even be denied health insurance based upon the risks they represent, much like how the industry treats bad drivers.

The additional risk with a bad driver is nothing compared to the additional risk of a person more in need of health care, and if these policies were offered the same way, then as one either gets sicker or older, the costs of it would escalate beyond what most people could afford to pay.

The majority of the money spent on health care is concentrated on those of advanced age, which only makes sense because this is the age where one’s health naturally deteriorates. So if this were simply based upon risk, this would leave most older people out of the picture. This is especially the case given how expensive health care has become these days.

So governments aren’t fond of seeing this happen so they step in and regulate this, including their stepping in and taking care of these matters themselves. Even the United States, with the most privatized and most expensive health care system in the world, has socialized health care for their senior citizens.

Beyond this, governments will also place limitations on insurance companies simply using the free market to decide this, placing restrictions upon them to protect people from being cast out when they no longer are profitable and represent a burden upon the system.

With long term care insurance though, we don’t have any of this, and the free market is for the most part left to decide. Some countries have better provisions than others here, where they step in to ease the burden of the need and expense for long term care, but there is always a gap as far as the quality of care that one may receive in this situation.

While the risks involved in life insurance are also highly concentrated among the elderly, the purpose of life insurance is to protect against the consequences of one dying prematurely, while long term care insurance deals for the most part with the normal expectations here.

So they are fundamentally different and long term care would be more like one seeking life insurance near the end of their life expectancy, at a time where it would be both difficult and expensive to buy it, at least in terms of getting the type of benefits that one can purchase earlier in life. You can still buy life insurance at an advanced age but the payouts are pretty minimal and to the extent where this insurance often does not even make sense for someone to get.

Saving For Versus Insuring Against Long Term Care Costs

With all this said, people do buy long term care insurance, even though it does not represent all that large of a segment of the overall insurance market. The time to start considering this isn’t when one is at great risk of this being needed of course, and as a general rule, if you are going to want to get this type of coverage, like is the case with life insurance, the earlier the better.

The first thing to look at is what the alternatives are if you don’t buy it, and that’s something not everyone considers enough. This is the case with many types of insurance, and you have to consider what the consequences are of your not having it versus the costs of having it, as well as exploring other alternatives to dealing with the risks.

It may be for instance that if this does wipe you out, government assistance would kick in and still make sure that you are taken care of, so in that case this reduces the real risk significantly.

One of the alternatives here is saving up the money yourself for this, and as it turns out, that’s very often the best alternative. In essence, this is what insurance companies do with your money, they save it for you, with the intention of keeping some of it for themselves.

Now that’s very often not a bad thing, because the need to spend it may happen well before you would have been able to save enough up, and this is the real benefit of insurance over saving yourself.

Given the nature of long term care insurance though, where the risks are very low earlier in life and are almost all concentrated once one has reached an advanced age, after retirement and often well after it, then it makes far less sense to rely on insurance rather than saving for this.

There are even some people in the insurance industry who advise that people look at primarily saving for this themselves instead, that’s now much sense this makes. Now this doesn’t mean that one should not purchase this insurance, and one may need long term care at any point in their lives, but the goal should be to cover yourself for this at times where you do not have sufficient time to prepare, and that’s the risk you should be looking to cover.

The real problem with relying on this at a time where it’s far more likely that you will need it is that the money that you’ve spent on it isn’t going to be set aside for you like it would be if you saved it yourself, as insurance companies want to seek out a profit looking forward, not back. So to some extent they will price their policies according to present risk, and you will pay more and more as you approach the likely need.

Saving up for the likely need though keeps all the money that you’ve saved in play and also allows for the flexibility of loading this more up front when you have the money, not in retirement where your income is generally less.

Some people may say that they can’t afford to save for this, but if you can’t afford to save, you can’t afford the protection at all really, because this isn’t a handout like a government benefit would be, it’s an investment, and one with a negative expectation overall actually. This negative expectation is desirable and even necessary in a lot of insurance situations, for instance if your home burns down, but not so much in others, like long term care.

So if one is covered when they aren’t ready, coverage which can be had very modestly in this situation, and along the way prepares well for greater expenses like this one toward the end of one’s life, that’s the ideal situation and perhaps the only sensible one.