By Gary Brooks, CFP®
One of the most difficult financial planning decisions is whether to purchase long-term-care insurance to possibly cover the costs of extended care late in life.
It is hard to know whether you clearly have enough savings to self-insure against this potential need or whether you do not and may benefit from passing the risk off to an insurance company.
Long-term care insurance is expensive, and there is no guarantee you will ever need it. Long-term care costs are typically staggering, however, and many people would prefer that their life savings be put to other uses.
Genworth, one of the small cadre of insurance companies that still offer long-term care insurance, does an annual Cost of Care Survey. The latest results were released in October 2017. There is some good news. The growth rate of long-term care services has slowed somewhat. In our financial planning work, we’ve historically assumed annual growth rates of 5+% for long-term care expenses. According to Genworth, over the past five years, the annual growth rate has been between 2.5% and 4% based on the type of services provided.
|Genworth Study: Key Findings|
|Monthly costs||National Median||Washington state|
|Home health aide||$4,099 ($22/hr)||$5,053|
|Nursing/memory care||$7,148 (semi-private room)
$8,121 (private room)
|$8,578 (semi-private room)
$9,447 (private room)
NOTE: The Genworth survey was completed by 15,000 providers of long-term care services.
Other noteworthy points from the survey:
- Costs (expense and time) are not limited to the person receiving care. 62% of caregivers (usually family) spend some of their own money to supplement care. 52% of caregivers had to work fewer hours (seven hours per week on average) reducing their income.
- The average age of a family caregiver is 46. This is mid-career for many people, stalling their own career development in some cases. Providing care (or even just coordinating and overseeing care that others provide) can affect personal health and wellbeing, leading to stress and depression.
- Additionally, there are still co-pays and deductibles for doctor visits and other uncovered expenses.
Because it is difficult to time long-term care needs or to project the extent and speed of costs escalating from one care level to the next, financial planning regarding LTC is imprecise.
In a thorough financial plan, it may be important to earmark some assets to be available for these potentially large expenses, but there could be a wide range of outcomes regarding real expenses and timing.
If you have no bequest goals, purchasing LTC insurance may not be necessary. Either you will have enough to cover your care or, eventually, you will default into the Medicaid system for those without enough income or assets to cover the cost.
If you do want to preserve assets for use by your spouse, for passing to the next generation, or charitable intent, having long-term care coverage may be helpful.
Because it’s hard to know if insurance policies will be needed, we think it is important to not over insure. There are LTC insurance policies that provide more coverage than is reasonably necessary. They only serve to increase the commissions of the insurance agent.
Where LTC insurance is desired, consider the following basic structure to have some coverage but not overdo it:
- Three years of coverage at $150/day, provides about half of possible need at nursing home rates.
- Inflation factor of at least 3%, preferably compound, not simple.
- 180-day elimination period, your self-insurance period.
This level of coverage could keep policy premiums more manageable. Of course, premiums are also based on the insured’s age, gender and health. First, you have to qualify for coverage after underwriting. By the time many people apply for LTC insurance (typically in the late 50s and early 60s), there may be medical issues that cause premiums to increase.
Over time, premiums will increase but only for whole groups of people, not individually based on changes to your health.
LTC insurance is not only difficult for individuals to evaluate, it is difficult for insurance companies to manage as well. Several very prominent insurance carriers no longer offer coverage. You can buy LTC insurance from captive agents that don’t sell products of other companies such as Northwestern Mutual, Mass Mutual, and New York Life. Alternatively, you can work with an independent insurance broker who can compare policies from Genworth, Mutual of Omaha, and Transamerica, among a few others. (NOTE: Genworth’s long-term-care unit is being purchased by a Chinese company and is re-evaluating how policies are priced.)
While the intent is to assist financially, long-term care insurance can also reduce stress for policy owners and caregivers. According to the Genworth study, 59% of caregivers where long-term care insurance was in place, reported feeling significantly less stress than those without LTC insurance.
Let us know if you have questions about LTC insurance and how it fits in your financial plan.
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