Think you don’t need long term care insurance? Here are three reasons why you shouldn’t “self-insure” your future care and instead should consider purchasing an insurance policy.
The range of outcomes is too large.
Not everyone will need long term care, but 70% of people turning 65 today are expected to need care in their remaining lifetime. Of these people, 20% will require care longer than five years.
How much does long term care cost?
- Nationally, a home health aide costs $54,912 annually, while a private room in a nursing facility costs $105,850.
- For a 65-year-old today, what does that equate to in the future when they are more likely to receive care? Using the average inflation rate of three percent, those same services in 20 years will cost $99,177 and $191,176, respectively.
- What if you are part of the 20% that will require care longer than five years? A five-year stay in a nursing home could cost over $955,000.
- In fact, the largest long term care claim was registered at over $2.6 million for someone needing care for over 20 years.
As you can see, the range of outcomes is so large (ranging from $0 to potentially over $1 million) making it difficult to plan without the use of insurance.
For a high net worth individual with the liquid funds available to pay for services, it still requires careful planning. Just because you don’t have long term care insurance doesn’t mean you can ignore it. A spending shock like long term care can mean less income for your spouse or decreased assets for legacy.
Insurance leverages your money far greater than self-insuring.
Let’s look at a hypothetical example of a 65-year-old female investigating whether to buy an insurance policy or to self-insure.
Her first option is to purchase a “modern” long term care policy (a life insurance policy with a long term care benefit).
- Her annual premium is $18,000 for 10 years. After 10 years, no additional premium is due.
- The policy provides a monthly benefit on day one of $4,979 if she needs care.
- This benefit compounds at a three percent annual rate so that at age 80, her monthly benefit is $7,757.
- This particular policy will pay out for six years. At age 80, that is a total long term care benefit of $602,078.
(If you would like to see where I got these numbers, send me an email and I’ll be happy to show you.)
Her second option is to “self-fund” or “self-insure” by keeping her money invested instead of paying the annual premium on an insurance policy.
To assess this option against the insurance option, she would need to know the rate of return needed to get the same total long term care benefit at age 80. Remember, the insurance option had her paying $18,000 for 10 years. By giving her a total benefit of $602,078 at age 80, this means the insurance policy has an internal rate of return of 9.16%!
If she feels like she can get a rate of return from her investments of over nine percent, then she can self-insure. However, this is hard to do (especially for retirees who tend to invest more conservatively). Plus, the insurance policy guarantees this rate. I love the stock market, but I can’t guarantee a nine percent return.
This illustrates how long term care insurance is a tool to leverage your money far greater than you can by self-funding. Some people can’t get past the premium. They see it strictly as a cost, not as a way to get leverage.
Modern LTC insurance provides benefits if not used for long term care.
But still, what if you don’t end up needing long term care? That’s a lot of money in premium costs thrown out the window.
With “traditional” long term care insurance, yes (although I’d still argue that it’s prudent). But not with “modern” long term care insurance. New policies can be life insurance policies with a long term care benefit. This provides additional benefits if you don’t use it for long term care!
Using the previous example of a 65-year-old female, what if she never needed long term care? Because it’s a life insurance policy, it provided her beneficiaries a death benefit equal to her premiums paid ($180,000) later in life.
Or, what if she changed her mind and didn’t want to keep the policy? There is a cash value if she wanted to walk away from the policy and take the available funds. After 10 years, this policy’s value was equal to her premiums paid.
Your plan needs to address future long term care expenses.
Long term care expenses can cause a “spending shock,” ruining your retirement plan. Even if you have assets set aside, insurance can improve your financial plan by narrowing the range of outcomes and giving you peace of mind.
With modern long term care policies, your assets can be leveraged to provide a greater benefit for paying for care. If no care is needed, the cost of premiums is offset by the benefits received through the life insurance component of the policy.
Curious to see how this works in your retirement plan? Schedule a time to talk with me: https://calendly.com/stewardshipjake
