Tuesday, July 25, 2006

LTC insurance: A smart financial decision?

Ok, let's say that you have some disposable income and you are trying to decide between purchasing long term care insurance and investing your extra money into other investments such as 401k's or mutual funds.

Some would say, "Hey, I'm still fairly young, so why not invest my money into a mutual fund and use the money made off of it to purchase long term care insurance at a later date"
For example, a person could invest their money at age 40 and cash the investment in at age 60 and the income made off of it could pay for their long term care insurance.

On the surface this sounds like a very smart plan that will make the most out of your disposable income. In general though this is not a financially sound move and there are a few reasons as to why that is.

First of all, if you take out a long term care insurance plan at age 40 vs. age 60 the amount of the premiums that you pay will be vastly different. The older a person gets the higher the monthly premium is for the long term care insurance policy. This is done because the insurance company knows that the older a person gets the more likely that person is to actually use the insurance.

Second, a person who waits until age 60 to get long term care insurance could experience a variety of medical problems that might make him or her fail underwriting screens (physical exams). Even if you are able to pass the underwriting screens, you will still likely face a higher insurance premiums because of those health problems that have accumulated.

Third, there is always the possibility that a person would need to use the long term care insurance benefits long before reaching age 60. In fact, many people require services that LTC insurance covers before they reach age 65.

As you can see, the longer that a person waits to take out a long term care insurance policy, the greater the likelihood that he or she will pay much more for the premiums of that policy. The residual income made by investing in mutual funds or 401k's will generally not make up for the increased price that you will pay for the insurance plan.

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