Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Do You Need Long-Term Care Insurance?

July 2008

The average life span continues to increase, and so does the cost of health care. As a result, many individuals are mulling the benefits and considerable costs of long-term care insurance (LTCi). Whether you need such a policy depends greatly on your financial situation and your desires for how your wealth will be spent. One thing is certain, however: There is no denying that many of us will need some sort of long-term care.

Long-term care isn’t about medical needs but is instead about taking care of the routine tasks we have to perform everyday: bathing, dressing, toileting, transferring and eating. Consider these alarming statistics:

• 1 in 10 over age 65 and 50% over age 80 suffer from Alzheimer’s – Alzhiemer’s Association www.alz.org
• The chance of an automobile accident is 1 out of 240; the chance of a fire damaging your home is 1 out of 1,200; the chance of needing long-term care is 1 in 2. – The National Academy of Elder Law Attorneys

LTCi coverage is not for everybody. To begin with, there is both a floor and ceiling to consider. The floor starts with an industry rule of thumb which states that no one should allocate more than 7.5% of their income toward LTCi premiums. The ceiling begins with clients with $3 million to $5 million of assets where the decision to purchase LTCi is purely discretionary. For individuals with investable assets in the $1 - $3 million range LTCi coverage is something that should be thoroughly evaluated.

For individuals with more than $3 million of investable assets, the question then becomes: Do I purchase insurance or self-insure? Let’s examine both:

Purchasing LTCi
Most affluent individuals who purchase insurance do so because they value leaving a legacy to either their children, charity or both. As a result, they want to eliminate the risk that their assets are eroded by a nursing home stay or the need for in-home care. Individuals with the goal of protecting their legacy should also consider a “premium-upon-death” rider to their LTCi policy that returns all of the premiums paid upon death to the policyholder’s estate.

Affluent individuals also purchase LTCi for emotional reasons. Having LTCi can shift the family’s focus away from the amount of money being spent and toward finding the best care. It also keeps families out of the role of caregiver and lets them focus on caring about you instead of taking care of you.

There are many affluent individuals who value leaving a legacy but who still decide to self-insure because of cost and uncertainties regarding actual coverage. The American Association for LTCi’s 2007 Price Index shows that a relatively healthy married 65-year old can expect to pay $1,292 annually ($1,923 if single). But perhaps more than cost is the issue of uncertainty regarding future premiums and claims. LTCi as an insurance product is still very young so premiums are not guaranteed to remain the same and there have been some reports of denied claims by some insurers.

The estimates of the cost of care are extremely varied. The Health and Human Services Department reports the cost for a typical three-year stay in a nursing home is $185,000 or $170 per day. Some estimates, albeit primarily from the insurance industry, put the price tag for in-home care for Alzheimer’s in the millions of dollars as the average length for Alzheimer’s is 8 years according to a Congressional study. Thus, individuals with more than $3 million can self-insure and typically dictate how they want to be cared for.

Often times financial planners will tack on the cost of long-term care to a person’s lifestyle expenses to forecast if their assets will last. The truth of the matter is that once an individual becomes too frail to stay active, expenditures shift from travel, caring for multiple homes, shopping and golf to paying for skilled care. Oftentimes it’s really not an additional expense but a shifting of expense.

In summary, the decision to buy LTCi, like almost any important financial decision, is one that must begin with defining what’s important to you from a values and goals standpoint. However, if you do value leaving a legacy it’s a discussion you should have sooner rather than later because pre-retirement long-term care planning can save you a lot of money if you decide that LTCi is right for you.  

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