Twenty-five years ago I received a phone call from my father and still remember the conversation. He had called to tell me that he and my mother had made a very significant investment in my financial future and was eager to tell me about it.
As you can imagine, he had my full attention and I could hardly wait to hear what he would say next. I must admit that I was thinking about how many zeros were on the check. But what he said was that they had just bought long-term care insurance (LTCI) policies.
In 1992, I’d never heard of LTCI. I had no idea what my dad was talking about. As he started to explain what this insurance covered I remember thinking that as soon as I got off the phone I needed to call my brother and sister because I was concerned that dad had lost it and might need supervision.
As the conversation progressed and he explained the benefits of this insurance, I remember saying to him that I would take care of him or mom if either needed assistance in the future. At that point he got pretty huffy with me and said that’s exactly why they bought the insurance. They did not want any of their kids to have to take care of them.
We talked about some of my parents financial goals in that conversation as my dad tried to help me understand the value these insurance policies represented. He cited four reasons for buying long-term care insurance:
- Not burden children
- Afford quality care
- Remain at home
- Transfer wealth
My parents thought LTCI would help them achieve all of these goals.
Traditionally in our country long-term care has been provided at home by family members – wives, daughters and daughters-in law. But our society has changed significantly over the past two or three generations.
Today there are more women in the workforce. We have high divorce rates. We’re having smaller families and families are spread geographically all over the country. Relying on family members to provide care is not the option it once was and that makes being able to pay for care more important than ever before.
Outliving income is the #1 reason people buy LTCI today.
When we work with clients, we still hear the four reasons why my parents bought long-term care insurance 25 years ago. But today, the number one reason that people give for buying this insurance is the fear of outliving income.
We read a lot about retirement preparedness today. The 2013 National Retirement Risk Index reported that 52% of households were at risk of being able to maintain their standard of living in retirement. The risk of needing long-term care is high and it’s expensive. Yet, less than 10% of Americans age fifty and older own long-term care insurance!
Do you think you will live a long life? Check out this life expectancy calculator. I did.* Then think about whether or not you might need some assistance as you age? Try to think past today. It’s hard to do because we are so focused on work, family and social events that take up all of our available time. But that can leave the future unplanned.
A long-term care event could really put a dent in the money planned for retirement years. How big a dent? Well it depends. Why will you need care? Will you need non-medical or medical care? How long will you need care? Where will you receive care? Home? Assisted living? Nursing home?
Long-term care is expensive! The national median cost of a private room in a nursing home is $7968 per month or $92,378 annually. Twenty years from now the cost is projected to be $13,903 per month or $166,845 annually. Can you afford to self-fund this expense? Check out the cost of care venues where you live.
More will need long-term care than not.
The government projects that by age 65 we have a 70% risk of experiencing a long-term care in our remaining years. And the risk increases with age.
What’s an event? It could be help recovering from a stroke which could last less than one year. About 41% of long-term care insurance claims last less than one year.
An event could also be the result of a chronic illness like diabetes or just growing old and becoming frail. The majority of claims last longer than one year. Claims history indicates that 59% of claims last longer than one year and the average duration of those claims is 4.2 years. About 17% last longer than five years and those tend to be associated with dementia.
If you think the government projections are unrealistic, check out the Alzheimer’s Association’s website, www.alz.org, and its projections for new cases. Every 66 seconds ….
Our view is that self-funding is too expensive.
For most of us there are really just three ways to fund long-term care: self-fund, transfer the risk to an insurance company or qualify for Medicaid.
We often hear that insurance is too expensive. Our view is that self-funding and Medicaid are too expensive.
When we work with clients we ask them to consider two questions:
- How much risk do you need to offset to an insurance company? In other words, how much of the cost of care could you afford to pay yourself? Is that 25%? Then you’d look to insure 75% of the risk. If 50% then you’d insure 50% of the cost of care. We suggest that clients evaluate the cost of care and their income between ages 80 and 85. This is when the majority of claims are filed.
- What is an affordable premium? Can you afford $100 per month in premium? $200? $500? The insurance premium needs to be affordable. A guideline from the National Association of Insurance Commissioners is that a long-term care insurance premium on a traditional policy should not exceed 7% of annual income.
If you’re in your forties and making good money that could be over-insuring. If you’re in your seventies and on a fixed income that could be unaffordable. That’s why we ask clients to define a premium budget.
In a recent study by the Health Insurance Association of America only about 31% of those purchasing long-term care insurance did so to protect assets. The 69% majority did so for emotional reasons like being sure they could afford quality care and not burden family.
The new norm is some insurance is better than none. We work to provide appropriate, affordable solutions based on your premium budget and risk assessment.
* I could live to be 106! Scary thought. I’m very glad that I have long-term care insurance. At 106 years old I know I’ll need help!