For many people, their financial security in retirement could hinge on a potentially expensive need for long-term care.
The decision of whether or not to protect against this risk through the purchase of long-term care insurance is a very important consideration for most people in their late 50s and early 60s.
Some affluent people can clearly self insure this risk, setting aside savings or investments to cover potential future costs. But there are many people who are squarely in between a clear ability to self-insure and a clear need to purchase insurance.
If you are deciding whether or not you can afford to self insure against the potential need for long-term care, there is a calculator that does a nice job of estimating the potential expense that you could face and how much you would need to save to overcome that expense.
The calculator available here starts with default entry points but you can change them to reflect your situation and other assumptions.
For instance, you’ll see a default annual cost of long-term care of $50,000. This figure may be applicable to in-home care and assisted living but more comprehensive nursing home care costs $80,000+ on average in Washington state. Another variable to change is inflation of long-term care costs. General cost of living may rise about 3% per year but health care costs increase faster. It’s better to enter 5% inflation if you are below age 70. If you are much above age 75, then a 3% inflation level should suffice. The length of long-term care need is a significant wild card in this equation. The average nursing home stay is 2.4 years and the average person entering a nursing home is 79 years old. Of course, you probably have a relative or acquaintance who spent many more years in a facility, particularly if memory care was needed.
Given a certain set of assumptions, let’s look at how much you would need to save to self insure a future need for long-term care.
This scenario produced the following outcome:
“Your future long-term care needs total $324,139. You have available assets of $10,000. To self-insure you will need to save $10,505 per year increasing at 0.0%, or, you can set aside a lump sum of $122,356 today and let it accumulate interest until needed. Alternatively, you could consider purchasing a long-term care insurance policy to cover the potential future expenses.”
You’ll notice that because of the annual inflation of LTC expenses, today’s $75,000 per year becomes $158,503 in 18 years when the hypothetical LTC event occurs.
Of course, you can change the variables to do some “what if?” calculations of your own.
The alternative to saving $10,505 per year in this instance would be to purchase long-term care insurance with enough benefit to cover much of the potential costs. The long-term care premium would be less than the $10,505 per year in invested savings. Premium rates differ based on age at the date of application, overall health and the amount of coverage purchased. In general, a relatively healthy couple in their early 60s could obtain three years of coverage at $150 per day with 3% compound inflation, 90-day elimination period for around $3,500 per year. Premiums are generally less expensive the earlier you apply if you are healthy. There are many ailments and conditions that can show up between 55 and 65 that cause the cost of policies to climb the longer you wait.
The premium would rise over time at different rates depending on the claims history of all of the people who purchased the same policy.
If you never qualify for long-term care or have only a brief need, your premiums would not be recovered. Alternatively, your own savings intended to self insure would be available to you for other goals or to bequest to your heirs.
In many cases, when long-term care is needed – particularly expensive nursing home care or full-time care in your own home – the cost of the LTC insurance could be more than offset by the benefits paid out in less than two years.
It’s an important consideration. Even if self insurance is the answer, that conclusion should only be reached after thorough review of the pros and cons in the context of your overall financial plan.
For more information about recent changes and challenges of the long-term care insurance industry, please read this article I wrote in the Tacoma News Tribune August 1.
- Use the calculator to determine what you may need to save in order to be able to self insure your long-term care needs.
- Determine if you are healthy enough to qualify for a long-term care policy. Most LTC insurance carriers will not accept people who have heart issues, diabetes cancers or other conditions that would make them more likely to become disabled.
- If you are healthy enough, then contact your financial professional to get a quote for this insurance.
~ Gary Brooks, CFP® — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA