First off, we do not sell any insurance whatsoever. While we advise clients on their individual insurance needs, we refer them to outside sources for implementation.
That being said, one of the biggest questions our clients face is “do I need long-term care insurance?” We hear it all the time. In fact, it’s a secondary concern for most retirees only after “do I have enough money to retire?”.
Unfortunately, most people don’t start asking these questions until it’s too late. By the time they decide if they need long-term care insurance or not, they’re typically in their 50’s or older. At this point, premiums have become outrageously expensive—cost prohibitive in most cases.
In reality, the question of “do I need long-term care insurance?” is really a question of “can I actually afford long-term care insurance?”.
What is Long-Term Care Insurance?
Long-term care insurance is a product designed to help cover expenses for those who need long-term health and medical care. People who use these benefits aren’t necessarily sick but in many cases simply unable to perform routine tasks such as:
These common tasks most of us take for granted are referred to as “activities of daily living (ADL’s).” At the most basic level, these are things which we as humans must be able to do for ourselves.
Once we can no longer perform these activities, we’re forced to rely on the help of others. Oftentimes, this requires moving into a skilled care facility.
The costs to house and staff quality personal care for your loved ones can be outrageously high! Here’s where long-term care insurance comes in.
Long-term care insurance—like any other insurance—was designed to defray the costs associated with these late in life expenses should they become a necessity!
How much does long-term care cost?
Long-term care is very expensive. According to Genworth (a leading long-term care insurance provider), the median annual rate of nursing home care is $82,128 for 2016. That’s more than most Americans make in a year!
Making matters worse, the average nursing home stay is roughly 3 years. 82k per year times a 3-year stay, and this means you may spend nearly a quarter million dollars in long-term care expenses!
It’s easy to see how quickly these expenses can eat into your retirement nest egg. While one spouse may cost nearly a quarter million dollars, if both spouses need care the costs could rise to a half million or more!
Since the financial risk to your retirement plan is substantial, you should at least consider investing in long-term care insurance. This insurance can protect your spouse—and your loved ones—should you incur these expenses later in life.
What types of Long-Term Care policies are there?
According to Thomas Day of the National Care Planning Council, there are five types of LTC policies:
- Stand-alone comprehensive long-term care policies. These are pretty basic and what you would expect. They’re also the majority of LTC policies sold today.
- Life insurance rider. Another way to get long-term care coverage is adding it as a rider to a life insurance policy. In this form, there is a life insurance benefit as well as a long-term care insurance benefit. The premium is essentially split to pay for each coverage separately.
- The either/or life insurance LTC feature. If the insured dies, the beneficiaries receive proceeds from the “life insurance” component. If however, they need long-term care, benefits are paid to offset healthcare expenses prior to the insured’s death. In this case, benefits are limited to policy maximums. Once the benefits run out the policy expires, and no life or LTC benefits remain viable. Should the insured die prior to the stipulated benefits running out, a reduced death benefit option may still exist.
- Integration with a deferred annuity. In purchasing a deferred annuity with long-term care benefits, part of the earnings pay for long-term care risk and expenses. This reduces the investment return the annuity would otherwise have. It also begs the question “Would I be better off investing somewhere else and purchasing long-term care insurance separately?”
- Packaged with a disability policy. Disability insurance with long-term care benefits can be combined together. Prior to age 65, the policy would be used for disability income. After age 65, the premiums are designated towards long-term care insurance coverage.
What type of Long-Term Care Insurance policy is best?
Those are a few types of long-term care insurance policies. Only one makes any real sense to me, which is buying long-term care insurance as a stand-alone policy.
Would you buy home insurance and expect it to return a profit? What about your car insurance? Would you purchase that hoping to cover an accident and also help you save for retirement?
Insurance is best bought to cover a specific financial need and nothing else! When insurance companies reach outside the box to create multiple savings, growth, and insurance protection possibilities—they end up overcharging for every component within.
How are Long-Term Care Insurance premiums paid?
Premium options vary based on the policy. Generally, you can pay premiums annually, semi-annually, quarterly, or even monthly. This mostly depends on your individual preference.
As with most purchases, buying multiple policies or purchasing longer contracts (annually over monthly) will prove to be less expensive.
Do you need Long-Term Care Insurance?
Long-term care expenses are a major threat to your retirement. For many retirees, as little as 50 to 100 thousand of unexpected medical expenses can completely derail an otherwise well-structured retirement plan.
Assuming that you, your spouse, or you and your spouse may need skilled care or medical assistance at some point in life is a good bet! The only question is how will you pay for that care?
There are 3 main ways to pay for your potential long-term care expenses:
- Self-insuring – Many people can afford to “self-insure”. Their assets are substantial enough to weather a potential medical or healthcare storm. Covering 250K for one spouse or 500K for both won’t represent a hardship to this group of investors.
- Relying on the state – Other people don’t have the financial means necessary to cover such expenses. In this unfortunate case, the state will cover much of the associated costs after personal financial assets are depleted.
- Those who need Long-Term Care Insurance – The third and trickier subset of retirees find that they have “just enough” assets to retire. The threat to them is they can be financially wiped out should the need for prolonged care arise late in life. For example, retired couples with a million in investment assets. They may live a comfortable retirement and “feel rich”, but a 500K long-term care expense hit to those assets would be financially devastating.
How much will Long-Term Care Insurance cost?
Determining what you should expect to pay is difficult. Every applicant is unique, financially and health-wise. There are a few steps, however, which can help you choose the right policy for your retirement.
The first step is to find out what average long-term care costs are in your local area. The Genworth calculator is a great place to start. After getting a ballpark estimate, consider the following carefully as each aspect affects the cost of insurance:
- Choose how long you want to receive your benefits – The average stint of long-term care lasts around 3 years, but this is just a generalization. Consider your family health history and members of your family who have received long-term care assistance when making this decision.
- Select your elimination period – This is similar to a deductible in insurance planning. It’s the amount of time you must wait once you’ve been certified by a professional to receive your benefits. Generally, elimination periods can range anywhere from 0 to 365 days.
- Choose your inflation option – This option exists to make sure your policy withstands the devastating impact of inflation. You would typically be more aggressive with this option the younger you are because you most likely wouldn’t be utilizing your long-term care policy for several decades.
- Choose your additional features and benefits – This is the main reason why its difficult to pinpoint a price without specific proposals in your hand. These options can range anywhere from survivorship benefits, returns on your premiums, and even spousal waivers.
The effects of caring for loved ones
“Do I need long-term care insurance?” Maybe, maybe not. Regardless, this question is quite prominent among our retirement transition planning clients.
They’ve seen first or second hand the mental, emotional, and financial effects of caring for a loved one. With this experience, people often see firsthand how devastating it can be!
Genworth is one of the largest long-term care insurance providers. They do a study called “Beyond Numbers” each year. The 2015 Beyond Numbers study has some interesting facts:
- 44% of caregivers experience depression-like symptoms
- 35% say it’s had a negative impact on their other family relationships
- 33% say they have an extremely high level of stress
From a financial standpoint, it gets worse for caregivers:
- 62% pay for care with their own money
- 45% experience a reduced standard of living
- 38% reduce or stop contributions to their own personal retirement savings
To make matters worse, your kids may end up paying your long-term care expenses. Most states now have filial support laws to ensure the state doesn’t bear the financial burden of long-term care expenses.
Due to these filial laws you’re not only risking your own personal financial stability—but the financial stability of your kids as well! This is perhaps one of the biggest reasons most people need to plan for long-term care expenses.
Long-term care insurance helps ease the financial burden
Having long-term care insurance will ease the financial and emotional burden on your loved ones. Caregivers have additional help and support, and their personal lives are far less impacted.
It’s safe to assume that long-term care insurance—if it’s needed—can vastly improve the quality of life for your loved ones. But again, most people wait too long to even ask the question of whether or not they need long-term care insurance.
Did you wait too late in life to ask the question?
So what happens if you’ve waited too long? Retirement planning becomes far more important . . . for starters.
If LTCI premiums are seemingly prohibitive, the decision to self-insure or not becomes overwhelming. It takes a comprehensive retirement financial plan to even determine if long-term care insurance premiums are affordable or not.
In the process, you’ll need to analyze multiple scenarios such as:
- What happens financially if you or your spouse becomes sick late in life for 3 years (or more)?
- Will the final medical expenses devastate my spouse financially?
- What if both of you need long-term care?
- What is your opportunity cost of the long-term care insurance premiums over your lifespan? Could you do better by investing those premiums?
- What happens if you self-insure and never need long-term care insurance? Will your beneficiaries benefit?
- What if we self-insure and self-fund major late in life medical expense? Will our beneficiaries be financially penalized if we do need long-term care?
The need for long-term care insurance summarized
- Moderate net worth investors should seriously consider purchasing long-term care insurance. Those with minimal assets have limited options. Primarily, this means going on state aid once their assets are depleted.
- Wealthy investors can afford to self-insure, in hopes of never needing this type of coverage. If they do need it they’ll have enough to cover the expense assuming their retirement plan is done properly.
- The earlier you invest in a long-term care insurance policy, the lower the premiums will be. Waiting until later in life—say your 50’s—might make purchasing a long-term care insurance policy cost prohibitive.
- Always review your options with a long-term care insurance specialist. There are many nuances to these policies which many financial planners don’t understand.
Ideally, you should start your search for a great insurance advisor by finding one who doesn’t take commissions. It’s more beneficial to pay them an hourly rate—even if it seems expensive—than a commission. This helps remove any conflicts of interest in their recommendation to you.
There’s a multitude of potential scenarios that must be weighed carefully. If you don’t have the capability to crunch the numbers it’s worthwhile to hire an hourly financial planner who does. Someone who can crunch the numbers and prepare a comprehensive plan.
Should you need further information, feel free to reach out to us directly. Our fee-only fiduciary planning firm does hourly and project financial planning for certain clients.