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.
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.” The 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.
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