Over thirty years ago, I received a phone call from my father, and I still remember the conversation clearly. 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 had never heard of LTCI. I had no idea what my dad was talking about. As he explained what this insurance covered, I remember thinking that as soon as I got off the phone, I needed to call my siblings 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 is precisely why they bought the insurance. They did not want any of their kids to have to take care of them.
We discussed 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 these goals.
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 31 years ago. But today, the number one reason that people give for purchasing this insurance is the fear of outliving income as the result of a long-term care event.
We read a lot about retirement preparedness today. The 2019 National Retirement Risk Index reported that half 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 is expensive. Yet, less than 10% of Americans age 65 and older own long-term care insurance!
Do you think you will live a long life? Will your clients? 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 is 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?
Formal long-term care provided by paid caregivers is expensive! The national median cost of a private room in a nursing home is $9,034 per month or $108,405 annually. Twenty years from now the cost is projected to be $16,316 per month or $195,791 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 event in our remaining years. And the risk increases with age.
What is an event? It could be help recovering from a stroke which could last less than one year. About 40% 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. Most claims last longer than one year. Claims history indicates that 60% of claims last longer than one year and the average duration of those claims is 4.3 years. About 20% 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 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 of the potential expense 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 would look to insure 75% of the risk. If 50%, then you would 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 standalone policy should not exceed 7% of annual income.
If you are in your forties and making good money, that could be over-insuring. If you are in your seventies and on a fixed income, that could be unaffordable. That is why we ask clients to define a premium budget.
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 am very glad that I have long-term care insurance. At 106 years old, I know I will need help!