How many of you have actually thought about your final years? If you are like most people, then you probably haven't. It's understandable; you are juggling so many things that your focus is probably on getting from one day to the next. When you do finally find some time to think about your future, the last topic on your mind is how you will spend your final years. Unfortunately those final days are going to come. While many of us will may not have thought through the details, there is one universal truth; the expense could be quite large. The actual cost will vary from person to person, but if we look at those around us needing care, then we can begin to prepare financially for the unknown. This article will review what to consider when researching long term care insurance companies, the average cost of long term care insurance, and examples of how to protect your assets from nursing homes.
Why You Need Long Term Care Insurance
Before we get too deep into this discussion it is important to consider that everyone’s situation is different. Therefore the following topics should be used for general information only. To better understand your personal situation it is best to work with a financial professional who is well versed in long term care insurance and the various insurance companies.
Advancements in technology over the last 30 years has led to a direct increase in the life expectancy of both males and females. According to the Social Security Administration a person age 65 today has a life expectancy of 20.44 years. As life expectancy increases, so do the number of years within retirement. Many retirees worry if they will have enough money "at the end" for unexpected expenses, given the number of years in retirement and the expense of retirement. A recent study by the Center For Retirement Research concluded that the average retirement age for men is approximately 64 and for women it is approaching 62. This means that funding a 20+ year retirement AND paying for long term care services in the future will require a fairly large bank account when you finally retire. Therefore, transferring some of the long term care risk to a insurance company may make financial sense. For over three decades companies have offered aging individuals the ability to purchase insurance in order to offset some of the costs associated with long term care services.
What To Consider While Researching Insurance Companies
When evaluating long term care insurance companies, you will need to consider many elements. The following are some highlights I use when research on behalf of my clients:
- Credit Rating - Financial strength is telling. Many companies are rated by rating agencies like Moodys, Fitch, and Standards & Poor. The higher the credit rating the more secure an insurance company is expected to be when paying claims. However, AIG is an example of an insurance company that experienced some significant problems in the 2008 Financial Crisis and received a bailout. Therefore, this cannot be the only metric used to evaluate long term care insurance companies.
Revenue - A company typically has many lines of revenue as a way to diversify their risk, increase profitability, and drive stakeholder value. Unfortunately, in some cases those other lines of revenue can create additional risks that may risk the overall companies financial health. For example, when AIG asked for the bailout it was the underlying subsidiaries and credit default swaps, not the core insurance lines, that created much of their financial distress.
Underwriting Experience - An insurance company who enters into a new market may not have the mortality and claims experience needed to appropriately price the new insurance product correctly. This can lead to underpricing early on and higher price adjustments later. While increasing future policy premiums is difficult, it is not impossible. In recent years some long term care insurance companies have raised premiums quite a bit to offset rising costs and claims.
- Claims Experience - Paying for a policy that is designed to transfer some of the long term care services expenses from you to an insurance company requires the company to actually pay claims. Considering the long term care concept has not been around as long as life insurance you will want to research the long term care company’s claims experience and customer service experience. The last problem you want to face when you need care is an insurance company unwilling to pay claims.
Long Term Care Insurance Cost
The cost of long term care insurance is the million dollar question everyone asks when I conduct a protection review. As we discuss the importance of long term care services and the likelihood that an individual will need some version of care later in life, I am faced with the inevitable question, “Should I self-insure or purchase long term care insurance?” That seems like a pretty straightforward question, and when I run discounted cash flow projections based on income, expenses, and available assets I can usually tell someone the probability of self-insuring against long term care expenses in the future. However, when I do this and someone is projected to self-insure I then run a projection of what it may cost to acquire a long term care insurance policy. The results are staggering and perplexing.
AARP conducted a study in 2003 that stated “the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older.” While this study does not discuss the incidences associated with the various types of long term care (i.e. home care, assisted living, skilled care, nursing home) it does highlight the fact that the need for care is fairly high. Couple this with the fact that the oldest baby boomers did not start retiring until 2011 at age 65 and we soon realize that the largest wave of people needing long term care services were not included in the original study. This could mean that as the boomers continue to age, the need for long term care services could increase.
- To evaluate the cost of long term care insurance at a very high level, you need three variables: The first is the cost of care. An estimate can be obtained from various sources like AARP or various insurance companies.
The second variable is the actual long term care insurance cost. Since each insurance company has their own pricing tables you need to inquire about rates with the insurance companies who meet your research criteria.
- Finally, you need to estimate as best as you can, your anticipated life expectancy and your potential health care needs in the remaining years.
That last variable may be like trying to look into a crystal ball but there are some tools and indicators you can use to help with this assessment (i.e. medical history, family hereditary issues, and social economic factors). Once you have these variables then you can estimate the possible need for long term care services. The following is an example:
If the annual cost of a private room in a nursing home today is $92,000 nationally, and you plan to only need care for the last year of your life then the cost of care would be $92,000. While there are other costs that are incurred above and beyond the facility, we will focus on the cost of the facility in this example. Now if the need for care is 20 year away and the costs for care inflate at 5% per year then the future cost would inflate to $244,103 for one year of care.
If we compared out of pocket cost of care to an assumed annual premium of long term care insurance today of $4,000 and multiple that annual premium by 20 years (assuming zero price increases over 20 years) then you would spend $80,000 on long term care insurance. Even if the insurance company increased premiums over that period by 100% to $160,000 AND your policy fully paid for your planned one year of care, then the long term care policy could pay out more then you paid in.
Again, it is important to reiterate there are many factors to consider when contemplating long term care insurance. For example, if you are hit by a bus or die suddenly in your sleep, then the investment in the policy could be lost as many traditional long term care insurance policies do not refund the premiums paid-in. If there is a likelihood of not using long term care insurance, then it may make sense to consider alternate long term care arrangements. The above referenced illustration is only hypothetical and should be used for general information purposes only.
How To Protect Your Assets From Nursing Homes
When I sit down with clients and discuss their legacy plans the conversation usually turns to protecting their estate from those outside of the family. Both during their active years, and later during their elderly years, most people want to control who is tapping into their pocket books. Controlling access and spending patterns ensures that they can use their money on themselves first, and leave whatever is left over to heirs, charities, or both.
As we previously discussed the cost of nursing homes can become quite expensive. When you add up the expenses leading up to nursing home care, like home health care, assisted living care, and adult day care, the total cost of care could be astronomical. Using long term care insurance, as discussed previously, is the easiest way to transfer some of the cost to someone else which in turn protects your assets. But what if you cannot afford insurance? What if you have a strong aversion to insurance? Is there another way? The short answer is, Yes.
In the event where financial assets and long term care insurance will not be sufficient to meet long term care services, then it may make sense to seek the advice of an elder care attorney. These individuals are well versed in the rules for Medicaid planning and can legally help you understand your options for redirecting funds into appropriate places so Medicaid is available to you while protecting assets from nursing homes, and Medicaid. These individuals will also help you understand the Medicaid look back rules and your state’s filial rules. Additionally, the elder care attorney can explain to you the rules for spouses when one spouse needs care while the other spouse resides in the primary home. There are specific asset and income limits, along with a list of exclusions, the couple needs to take into consideration if only one of them needs care.
Between long term care insurance and a well drafted elder care plan your assets have the best chance of being passed on to your intended heirs, instead of going to third parties.
To know if long term care insurance is right for you the first step is to start doing some research. Estimating your life expectancy, assessing and estimating your health in your final years, and projecting whether your financial resources will last until the end takes time. More importantly, conducting that research is not a one time event, rather it is a process that should be conducted regularly to determine if the anticipated outcome is expected to change. In life nothing is static, which makes planning for the future a continuous process. If you are the person who is constantly on the go and does not have time to estimate, project, and analyze, then it may make sense to bring in someone who can assist with the process.
Remember, planning for the future does not have to be scary if you start early enough. The scariest part comes when you didn’t plan at all and are faced with an unexpected event now.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Long-term care insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details. All policy guarantees are based upon the claims paying ability of the issuer.