Is Long Term Care Insurance Right for You? – Part 2

Jane Young, CFP, EA

Jane Young, CFP, EA

As mentioned in my previous post, about 75% of the population will spend $10,000 or less on Long Term Care (LTC) and about 6% will spend over $100,000.  You may not need extended LTC but due to the significant costs, the possibility should be addressed in your financial planning.  According to the U.S. Department of Health and Human Services the average monthly cost for long term care in 2013 was $1343 for adult day care, $3,500 for assisted living, $4,000 for home health care and $6,500 for nursing care.  Based on cost increases over the last 5 years, it’s reasonable to assume that LTC will continue to increase about 5% annually.  If we assume a current LTC cost of $5,000 per month, with a compound inflation rate of 5%, the annual cost of LTC in twenty years could be $159,197.  Although the probability of needing LTC for an extended period of time is low, if you need care, it can quickly diminish your retirement nest egg.

Based on the danger of depleting your savings, LTC insurance may seem like a logical option but the cost can be significant and it’s not without risk.  The cost of LTC insurance is dependent on your age, your health, the daily benefit, the benefit period and the inflation protection.  Below are some average LTC insurance rates for individuals with a standard health rate, a daily benefit of $150, a benefit period of 3 years and a 3% compound inflation growth option.  The average LTC care insurance rate for a single person age 55 is $2,007 per year, the rate for a couple both 55 is $2466, and the rate for a couple both age 60 is $3,381.

If you decide to purchase LTC insurance, compare prices and work with a couple of different brokers who work with several companies.   Companies have different niches where some may have the lowest prices for those in their 50’s while others may focus on clients who are in especially good health.  A good insurance broker can help you select the best provider for your situation.

You also want to purchase LTC insurance from a high quality company, this is not the place to go with the low cost provider.  Select a company with a reasonable chance of being solvent down the road, when you need the coverage.  Over the last several years, 10 out of the top 20 providers have stopped providing LTC insurance.  Additionally, as a result of higher than anticipated LTC costs, low interest rates and a larger than expected number of people holding on to their policies, LTC insurance companies have significantly raised their premiums.  Many older policies have had premium increases in excess of 20% – 40%.  Although industry insiders claim to have a better handle on this going forward, there is still a risk of premium increases in the future.

Do You Need Long Term Care Insurance? – Part 1

Jane Young, CFP, EA

Jane Young, CFP, EA

As retirement grows closer the decision on how you will cover potential long term care expenses becomes a serious concern.   Unfortunately, with the high cost of long term care (LTC) and the high cost of long term care insurance there is no easy solution.  LTC refers to services or support to help you with medical or non-medical personal care needs.   LTC can provide assistance with cognitive impairment and activities of daily living such as eating, bathing, dressing, using the toilet and assistance with incontinence.  About 80% of all LTC is provided in the home.

LTC expenses can be paid with a combination of personal or family savings, LTC Insurance and government assistance.  Generally Medicare does not cover long term care.  Medicare will provide 100 days of skilled nursing care following a 3 day stay in the hospital.  Medicaid will pay for LTC after most of your assets have been depleted but Medicaid is usually limited to skilled nursing home care.

The decision to purchase LTC insurance is straight forward for the affluent who can self-insure and for those with little or no assets who must rely on Medicaid for their LTC expenses.  The decision is more complicated for those who can’t afford to self-insure but want to protect their assets to provide a livelihood to a surviving spouse, an inheritance to children or want to avoid being a burden to family.

Individuals who are at the greatest risk for needing LTC are those with a history of a chronic condition such as high blood pressure or diabetes, or have family members with a history of a chronic condition.  You may also have a higher risk if you are in poor health or have poor diet and exercise habits.  Women are at greater risk than men because on average, they live 5 years longer.

According to a study using a microsimulation model performed by Kemper, Komisar and Alecxih, on average people currently turning 65 will need LTC for three years.   They found that 3 out of 10 people will rely on family for their care for more than 2 of these years.  They also found that 2 out of 10 people will need care for over 5 years.  Overall, their analysis indicated that 50% will have no out of pocket expenditures for LTC, 25% will spend less than $10,000 and 6% will spend over $100,000.

Additionally, based on information from leading insurance actuaries, the Association for Long Term Care Insurance reported that someone who buys a LTC insurance policy, with a 90 day elimination period, at age 60 has a 35% chance of using it before they die.  They also reported that the average stay in a nursing home is 2.3 years for men and 2.6 years for women. Most care is provided at home but statistics on this are limited.

My next column will address the cost of LTC and LTC insurance and the pros and cons of purchasing LTC insurance.

Protect Your Family Against a Loss of Income

Jane Young, CFP, EA

Jane Young, CFP, EA

In addition to an emergency fund for unexpected short term expenses, you need to protect yourself and your family from a long term loss of income.  If you have a spouse or children who are dependent on your income, you should consider term life insurance and long term disability to provide them with income should you die or become disabled.  If you have no dependents, you should consider long term disability to cover your own living expenses if you become unable to work.  

Although, life insurance can be a dirty word, low cost level term insurance is relatively inexpensive and provides an important safeguard for those who are dependent on your income.  Some common reasons to buy life insurance are to replace income, pay-off a mortgage, and to put your children through college.  The most economical way to meet these needs is through the use of level term insurance.  The amount of insurance you need depends on your objectives for getting insurance.   The term of the insurance should be based on the timeframe during which you need to replace income or pay for other major expenses.   When you buy level term insurance, you have a guaranteed level premium and a guaranteed death benefit, assuming you pay your premiums on time. Unlike whole life insurance, term insurance is pure insurance, there is no investment element.  Once the term has expired there is no residual value. 

It is common to buy level term insurance to cover 20 or 30 years until such time the kids have made it through college or your home is close to being paid off.  To save money, you may consider purchasing several policies with different terms and different objectives. For example, if your mortgage will be paid off in ten years, your kids will be out of college in 20 years and you want to provide your spouse with income replacement for 30 years, buy three policies with terms that correspond with the timeframes of your objectives.

Many people buy life insurance but few people have long term disability insurance.  No one lives forever, but during your prime earning years the probability of becoming disabled is higher than that of dying.  According to the Social Security Administration, over 1 in 4 people who are currently 20 years old will become disabled before age 67.   About 69% of all private sector employees have no long term disability insurance.  If you have loved ones who are dependent on your income, you should consider buying long term disability insurance.

When shopping for life insurance and long term disability shop and compare prices. Do your research and get quotes from several companies with low fees and commissions.  Consider working with insurance brokers who work with a variety of different insurance companies.  They can provide you with information on premiums from several insurance companies along with the companies’ financial strength rating.

Are You Ready for the Unexpected?

 

Jane Young, CFP, EA

Jane Young, CFP, EA

The recent fires remind us how crucial it is to plan for unexpected financial misfortunes.  An important part of financial planning is ensuring you are adequately protected from life’s calamities.  You can’t control what life throws at you, but you can ease the blow by being prepared and keeping your financial life in order.

This may seem obvious, but we have a tendency to procrastinate when it comes to insurance and other precautionary measures.   You should always maintain an emergency fund of three to six months of expenses.  Even with good insurance, it may take time for the insurance company to reimburse you for a loss.   You should review your insurance coverage on a regular basis.  While most of us have home and auto insurance, things change and you may need some adjustments.  I encourage you to meet with your insurance agent at least once every three years or when there is a major change in your life.  Even if you are adequately insured, it is advisable to periodically get quotes from several reputable insurance companies. This can lead to considerable savings as your life circumstances change.

Make sure that you have adequate insurance to cover the current replacement value of your home and your personal property.  This is especially important if you’ve made significant home improvements.  You also need adequate insurance to pay for a place to live until you can buy or build a new home.   You may need a rider or additional coverage if you do business out of your home or you have collectibles, jewelry, art, or firearms.  It is prudent for most to have an umbrella liability policy equal to one to two times your net worth.  A good insurance agent can help you assess the risks that are unique to your situation and ensure you are adequately covered.

In addition to insurance you need an emergency plan to help you react quickly, should a disaster strike.  I recommend keeping all of your important documents in a safe deposit box.  Be sure to back-up important computer files at an off-site location.  Document all of your personal belongings and special features of your home with a video or pictures; this should also be kept in safe deposit box.

You also need to be prepared should something happen to you.  If others are dependent on your income, consider term life insurance to help them get by without your assistance.  If you are a primary wage earner, consider long term disability insurance to provide income if you are unable to work.  You should have a current will and health power of attorney.   When reviewing your will, be sure to review beneficiary designations for your retirement plans, annuities, and life insurance policies.

Generally, if you live within your means, stay out of debt and save 10–15% of your income, you will be better prepared to handle financial disasters that may arise.