We plan for long-term care costs with our clients. It is a very important part of risk management for our client’s plan. Where we are Fee-Only advisors, we do not sell insurance or any products. We work with pre-screened insurance advisors — not salespeople. We are involved in the entire process to make sure that the coverage is adequate for each unique situation.
According to the U.S. Department of Health and Human Services, nearly 70% of people currently age 65 or older will need some type of long-term care during their lifetime, with 35% needing nursing home (skilled) care. The costs of long-term care can be staggering. A 2017 Forbes Magazine article pegs the average cost of a private room in a nursing home at more than $8,000 per month and climbing. In high cost areas, this expense can exceed $11,000 per month. The Genworth Cost of Care Survey for 2017 found average costs in MA of $5,600/month for assisted living and almost $5,000/month for a home health aide. Cost in NH for these services averaged $4,900/month and $5,000/month, respectively. While the average length of stay in a nursing facility is currently less than one year, it is not uncommon for an individual to require care over a long period. This can be especially true for dementia sufferers or Alzheimer’s patients. When you consider that, a 5 year stay in a nursing home could exceed $600,000 ($120,000/year x 5 years = $600,000). In addition, the usual process is multiple years of home health care and assisted living before entering a nursing home. The cost of care could easily exceed a million dollars. Having a plan to cover potential long-term care costs is important. Are you prepared to cover these costs should the need arise?
Without long-term care insurance a long illness that requires skilled care can devastate a family’s finances. A healthy spouse may not have enough money to maintain their lifestyle. The fixed income of the infirmed spouse will be used to pay for the skilled care. This income is usually far from adequate to pay the entire long-term care bill. Therefore, you must deplete the assets of both spouses to pay the bills for care. This leaves the healthy spouse with insufficient income and assets to maintain their lifestyle.
What is Long Term-Care Insurance?
Long-term care insurance is an insurance product which pays the costs associated with long-term care once an insured individual is unable to independently perform two of the six activities of daily living – eating, bathing, dressing, toileting, transferring, and continence. Traditional long-term care insurance policies require that premiums be paid on a continual basis. They are similar to an auto or homeowner’s policy in the sense that they accumulate no value and most return no premiums if benefits are unused. There are some long term care/life insurance hybrid policies that will pay a death benefit.
When/How Do I Obtain a Policy?
Although long-term care can be needed at any age, the likelihood increases as we age. As with life insurance policies, the cost of a long-term care policy will be tied to your age and risk factors. Insurance carriers will require a review of medical history and possible cognitive testing to decide whether they will offer coverage and at what price. Insuring at a younger age (say 45-60) will result in lower premiums as you will be less likely to suffer from underlying medical conditions. If you wait too long, premiums may be out of reach and your coverage options may be limited or you may be denied coverage as underwriters have become very selective.
When looking for a long-term care insurance policy, look into all your options. While most people end up buying a private policy through a licensed long-term care insurance broker, your employer may offer coverage for you and possibly your family members. Employer-sponsored coverage may not require a health exam and may be portable – meaning you can retain coverage when you leave employment. Similarly, coverage may be available at favorable rates through various professional associations to which you belong.
Potential Cost of Long Term Care Insurance
Costs for long-term care insurance can vary widely based on numerous factors such as where you live, the coverage options you choose, your age, and any risk factors uncovered during underwriting. Ask your insurance agent to provide competitive quotes from numerous carriers. For a health individual, a policy covering $7,500 of monthly costs for 4 years will cost approximately $2,500-$3,500 annually if you obtain coverage prior to age 60. The cost increases substantially after age 60-62.
If you are married, talk to your insurance agent about whether a shared-care rider may work for you. This option allows for two married insureds to share the same pool of funds. You could save on premiums by each purchasing a smaller amount of coverage which would be combined into one pool of money that can be drawn on by both of you. It is a good way to hedge your bets. The chance one of you will need care is much higher than both of you. With this approach you are self-insuring a portion of the risk in order to lower your insurance premiums.
What Coverage Level/Options Should I Choose?
Without a crystal ball, it is impossible to know what your future long-term care needs will be. That said, research the current cost of care in your area and consider what resources you will have available to contribute toward meeting those costs. Ideally, consider a policy which will plug this gap.
You can save on premiums by reducing your maximum benefit, reducing your maximum coverage period, or increasing your elimination period. Be careful about eliminating benefit triggers since you don’t know which coverage you may need in the future. For example, a plan which limits coverage in the case of cognitive impairment may not meet your needs in the future given the increasing prevalence of Alzheimer’s and other forms of dementia.
While eliminating/reducing the inflation adjustment (COLA) feature will also reduce premiums, it is not recommended. According to the Forbes article cited above, nursing home costs increased 5.5% from 2016 to 2017 alone. Considering that you may not need to claim benefits for 20-30 years, your coverage could be seriously lacking without an inflation adjustment feature.
We and the insurance experts we work with are adamant that you must have an insurance or otherwise known as a Cost of Living Adjustment (COLA. Otherwise your policy will be woefully inadequate when you need it. If the cost of a nursing home is $10,000 month today, in 25 years the cost would be approximately $20,000 at average inflation.
Conclusion
A long-term care insurance policy should be considered as part of a plan to cover potential long-term care costs. You have worked hard over a lifetime to build assets for retirement and possibly to leave a legacy for younger generations. Don’t allow the need for long-term care to sabotage your plans. Plan ahead so you are prepared to pay long-term are costs should the need arise in the future.
If your advisor does not work with you to mitigate all risks or only sells products, please give us a call. We know you will find our comprehensive Fee-Only approach, that is entirely focused on you, refreshing.