Financial Planning is more of an art than a science. Unfortunately, we can’t scientifically plan out the rest of our lives and unforeseen events do happen. For many of our clients, the great unknown is whether they will have a long-term care event, and if they should consider long term care insurance to help offset the cost. Like forecasting investment returns, we don’t have a crystal ball and can’t predict the future. However, we can use statistics to ground our thought process and make a more well-informed decision. Whether you need insurance or not, you most certainly should take the time to explore the options available to you and what might be right for your situation.
According to Morningstar, a global investment research and investment management firm, 15 million Americans will have a long-term care need by 2050. The chances someone turning 65 today will have a long-term care need is virtually a coinflip (52.3%). The costs for care vary widely depending on the type of care (adult day care, assisted living facility, nursing home) and geographic location. There are obviously a lot of variables to consider: Will I have a long-term care need; What type of assistance will I require; and For how long?
Long-term care insurance is expensive because long-term care is expensive! When you consider the median annual nursing-home cost (private room) in 2016 was $92,378 and the expected long-term health care inflation rate of 5.2%, insurers need to protect themselves in the event you have a need for such care. Although, the average stay in a nursing home for men is just 0.88 years and 1.44 years for women, these costs add up and grow quickly.
Just a decade ago, long term care policies were extremely popular. Over 100 insurance companies offered coverage. Today, fewer than 15 insurance companies offer coverage and we’ve seen sales fall sharply. Why is that? It turns out, the possibility of needing long-term care is very difficult to predict. Insurance companies went bankrupt offering these policies as they underestimated the expenses of care. With less competition, insurance companies were able to raise the premiums for their policies, making it more expensive for the consumer. Essentially, it’s both a risky business selling AND buying a policy in the marketplace today.
If you are going to pursue purchasing Long-Term Care coverage, consider the following:
- Consistent with life insurance, the annual premiums are lower the earlier in life you purchase a policy.
- Individuals can be denied coverage if they have significant pre-existing conditions.
- It’s important to research what is covered in a policy as this can vary across insurers.
- Ensure the company you choose is highly rated and has a long history of paying out to their customers.
- Premium payments are usually flexible — Policyholders can pay annually or in a lump sum.
You may also discover insurance companies offering hybrid plans that are a combination of long-term care insurance and whole life insurance. In most of these plans, you may recover a death benefit (oftentimes equal to your total premiums paid), should you not need the long-term care insurance piece. These policies are typically 3-4 times as expensive as a stand-alone long-term care policy.
The decision to purchase a policy and the type of coverage is a difficult one. At the end of the day, we want our clients to feel comfortable with the financial plan we develop and to recognize potential threats to their plan, like the need for long-term care. As Fiduciaries, we don’t sell any insurance, but we do have the tools and technology to guide our clients through the decision-making process. If this is a topic for which you need further insight, contact one of our Advisors.
*Society of Actuaries: https://www.soa.org/research-reports/2016/research-hlthcare-trends/