Insurance is a complex topic, one that is typically sold through tactics that can either tug at your heartstrings or cause fear. This is particularly relevant for those who have considered purchasing long-term care insurance.
If you count yourself among this group, you have probably encountered questions like, “Don’t you want to protect your family?” “Let me tell you a story about a woman who spent four years in hospice care and lost all of her savings.” “What will happen to your kids if you pass away unexpectedly?” While many of these questions are valid, they should also be accompanied by a thorough explanation of what you are buying and important factors to consider.
Fortunately, asking yourself a few key questions can help you assess whether purchasing long-term care insurance is the right decision for you.
Ask Yourself ‘Why’
The first question is a simple one: Why are you interested in buying long-term care insurance? From our experience, there are generally three reasons people consider this type of coverage.
One primary consideration is risk. Insurance pools risk together and shifts it from you to an insurance company; this is an attractive concept to many people. For a small sum of money, the risk you may acquire from a potential long-term care event is someone else’s concern. The second reason is that you may have witnessed the financial toll that specialized care can cause. Whether it’s hospice care, memory care or other types of long-term medical care, these services can be very expensive and can drain a lifetime of hard-earned financial assets.
In addition to these factors, some people may also be motivated by the tax benefits of a long-term care insurance policy. Depending on your tax situation, you may be entitled to a tax deduction from premium payments, and when you need the policy to pay out, the benefits can be tax-free!
If none of these reasons resonate with you, then long-term care insurance may not be the right option for you at this time. However, if you find yourself nodding your head when reading these reasons, then it may be a good time to sit down with your financial advisor and discuss your needs.
Assessing Your Needs
At this point, you might be thinking, “I am interested in learning more about long-term care insurance, but do I really need it?” After all, there are many things in life that we are interested in purchasing, but don’t always need (something my girlfriend reminds me when I mention the signed Michael Jordan basketball I want to purchase). If you buy a long-term care insurance policy, you are using today’s money to help safeguard your finances against a future risk that could potentially wreak havoc on your savings. However, it’s important to keep in mind that insurance comes at a cost; depending on the ratio of your net worth to the potential cost of care, it may or may not make sense for you.
To figure out the potential cost of care, let’s consider the annual cost of a semi-private room in a nursing home, which for discussion purposes we will say is roughly $80,300 per year. Additionally, you’ll also want to factor in the common policy coverage time, which is typically three years. That brings the cost of care to $240,900. When thinking through this process, one standard approach is the long-term care insurance “traffic light” model1:
If your current net worth is five to 12 times the total cost of care, you should strongly consider buying long-term care insurance.
If your current net worth is 12 to 20 times the total cost of care, long-term care insurance may be suitable for you; however, further consultation is warranted.
If your current net worth is less than five or greater than 20 times the total cost of care, long-term care insurance likely does not make financial sense for your situation. If you have a net worth less than five times the total cost of care, the price of insurance today likely outweighs the benefits for you. If your net worth is more than 20 times the total cost of care, it may be wise for you to “self-insure” and pay for a potential long-term care event out-of-pocket, without concern that it may deplete your financial assets.
If you are in the red light range, you likely have no financial need to purchase long-term care insurance and have reached the end of the decision-making process. However, if you fall within the yellow or green light range, it may make sense for you to factor long-term care coverage into your financial plan. Once you’ve assessed your needs, the next step is to determine how much insurance coverage you should purchase and how you should structure your policy.
Evaluating Coverage Options and Policy Structure
The amount of coverage you require directly depends on how much you will need to pay to finance appropriate care.
Cost of care can vary from facility to facility and from state to state. According to Genworth, the national average cost of a semi-private room in a nursing home is about $80,300 per year.2 However, averages across various states range from $51,100 per year on the low end to as high as $281,415 per year.3 When determining the amount of coverage you should purchase, look closely at the average cost of care in your city and state, or research facilities in your area to understand what the cost could be for you.
As for the structure, it’s important that you closely review the contract or agreement that comes with your policy. Insurance companies are notorious for selling people excessive and unnecessary insurance riders, which are provisions that provide the policyholder extra coverage beyond what is offered in the initial policy. The key rider for long-term care insurance is an inflation rider, which is often offered at five percent per year.
As we all know, health care costs can grow quickly and the last thing most people would want is to pay premiums for years, only to find out that their policy does not accommodate their cost of care. If you are married, you may consider a “shared-care” policy. This allows you and your spouse to have a shared-benefit pool, which is more likely to cover your needs as a couple. If you are single, you might want to consider looking beyond the standard three-year benefit period (which equates to six years with a shared-care policy) and instead select a policy with a five-year benefit to receive more protection.
Once you have worked your way through the decision-making process and have decided to purchase long-term care insurance, there are three final items to consider:
Age: Typically, people between ages 50 and 70 receive the most benefit from purchasing a long-term care insurance policy, with the sweet spot falling between ages 55 and 65.
Health: This is important for qualifying for long-term care insurance at a reasonable rate, as your health history will play a large role in determining the cost of coverage.
Policy Review: Once you have purchased long-term care insurance, meet with your financial advisor periodically to review your policy. For instance, if you find that your premium amount has gone up by 25 percent or more, you may need to re-evaluate your needs and determine whether long-term care coverage is still right for you.
It’s important to closely evaluate your personal and financial situation to determine whether long-term care insurance fits into your financial plan. It’s always a good idea to enlist the help of your advisor, who can walk you through the decision-making process and help ensure that you and your family are well-protected.