Is Longevity Insurance a Substitute for Long Term Care Insurance?

Most of the news I read about long term care insurance is bad. Insurers as a group did not properly analyze their risk. Consequently, they are imposing huge premium increases on policy holders and/or exiting the business altogether.

We bought long term care policies several years ago. So far, we have not experienced a rate increase but I expect that to change. Our policies are with MetLife. MetLife no longer sells long term care insurance. I am concerned that MetLife will try to kill its existing LTC business with draconian rate increases. We shall see.

Some experts are so concerned about the future of long term care insurance that they are recommending that no one buy it. Instead, some suggest that baby boomers purchase some “longevity insurance.” ┬áThe technical term for longevity insurance is a deferred annuity. The principle is simple: You pay a lump sum premium now for the right to collect annuity payments for life, beginning at some date in the future. For example, a 60 year old man could spend $100,000 today for the right to collect $3,240/month when he turns 80. That’s a hefty return of 39% if you ignore the intervening time value of money.

Why would this be preferred over long term care insurance? There are several reasons. First, assuming that you live to age 80, you are guaranteed to receive some benefit from your payment, even if you never need long term care. Second, your costs are fixed and known in advance with no “surprise” premium increases. Third, if you live for a decade of more after you start receiving your deferred annuity payments, the return on your investment is way beyond what LTC insurance will provide.

So what are the downsides? The obvious one is that you may need long term care before you turn 80 (or whatever age you select for your deferred annuity). If that happens, the $100k or so you paid for the longevity insurance does you no good. Second, by the time you turn 80, inflation could have substantially eroded the value of the benefit to the point that long term care costs are much greater than your monthly annuity benefit.

My current thoughts are to stand pat with what we have. If MetLife secures a large premium increase (which requires state agency approval), I will certainly look again at the relative costs vs. benefits of keeping the long term care policy compared to purchasing a deferred annuity as longevity insurance.

Here is more information about the economics of longevity insurance.

Your thoughts?


Comments

  1. says

    Of the two risks that you identified for longevity insurance, I’m most concerned about inflation. We both probably lived through the high inflation of the 1970s and early 1980s. It could happen again. Is it possible to buy longevity insurance with an inflation rider?

    I think you smart to keep your Long Term Care Insurance.

  2. dewayne drummond says

    Do you really think you need long term care? Based on emails I have received from you, I believe you should probably save your money and self insure. I am sure you are putting enough aside that you can do it. I am.

    A few years ago, Consumer Reports had an article that suggest once you have x amount of assets, it made more sense to self ensure.

    I was force out of work 4 years ago (wanted to work until 70 – enjoyed the work).

    We have been living off DB retirement income and will start drawing SS in May at age 70 and will be forced to do RMD from IRAs which we don’t need.

  3. Bill says

    I’ve never seen longevity insurance with an inflation rider, but would also like to know if one exists.

    Your long term care policy likely carries an inflation rider. I recall something about “qualified plans” back when we bought ours, all carriers wanted their policies to be qualified (so that the premiums could be deductible as medical expenses); one of the requirements was such a rider.

    If you wanted a deferred annuity to cover the LTC costs, you need to factor in the inflation factor. With LTC inflation of 5% over 20 years, the current cost of $115K/yr increases to $305K/yr, or $25K/mo, or spending $770K on the annuity premium today. My conclusion is that long term care insurance, even with exorbitant price increases on today’s policies, is still much cheaper.

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