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.

Learn More About Long Term Care Insurance at Our Next Fireside Chat on July 11th

Please join us for lunch, at Pinnacle, for our next Fireside Chat on July 11th at 11:30.  We will discuss Long Term Care Insurance.  As always this is purely educational and free of charge.  Please call Judy at 719-260-9800 to RSVP.  Please let us know if there are any topics that you would like us to discuss at future Fireside Chats.