Do I Really Need Long-Term Care Insurance?

Most younger people are not probably thinking of long-term care insurance.  It’s no surprise older people close to retirement or at the retirement age are thinking about long-term care insurance as they want to be prepared for the financial burden of potential extended stays in a care facility.  They fear the vulnerability of their retirement savings to the unknown and uncontrollable.  The problem is that by the time most people want to start thinking about protecting themselves, the premiums are either very high or the person cannot even get coverage due to his/her health history.

What is long-term care insurance?  Long-term care insurance covers the cost of basic daily needs over an extended time.  While health insurance helps with immediate medical expenses (e.g. a trip to the doctor, a prescription, a particular sickness, etc), long-term care insurance helps people with the cost of care for various disabilities and/or chronic diseases assuming they meet certain conditions spelled out in the insurance policy.

Do I really need long-term care insurance?  Obviously death is inevitable but it’s not certain whether or not you or I will spend time in a care facility before we pass away.  This care could be home care, assisted living, respite care, hospice care, or a nursing home.  It’s noteworthy to mention that people who need long-term care are typically not actually sick with a specific disease, but they are just unable to perform the basic (ADLs) activities of daily living.
Here are some interesting facts:

  • According the National Clearinghouse for Long Term Care Information, men (average age 65) are expected to require some type of long-term care for 2.2 years and women (also average age 65) are expected to require 3.7 years of care.
  • About 60 percent of individuals over age 65 will require at least some type of long-term care services during their lifetime according to the Centers for Medicare and Medicaid Services.
  • Yet according to the American Association for Long-Term Care Insurance, only 8 million out of 313 million Americans actually have long-term care insurance.
  • The costs for these care facilities are far from cheap.  They can wipe out your entire savings.  They can cause you to bestow significant financial burden to your family.
    • For example:
    • Assisted living can cost $4000 to 6000 a month on average while nursing homes can cost $300-450 a day
    • A home health aide can cost $20-30 an hour
    • Many people presume that Medicare/Medicaid will cover long-term care.  Medicare does not typically cover it and Medicaid only pays for it if you have little to no assets.

When evaluating long-term care insurance options, read the fine print to see what it covers (as well as the maximum benefit) as plans will differ.  According to the 2013 Milliman Individual LTCi Survey, published in Broker World Magazine July 2013,  the average premium per new policy in 2012 was $2,449, a 5.5% increase from 2011 and the average issue age is 56.25 years.   The study also showed that 20% of plan applicants are rejected for coverage.  It’s interesting to note that coverage has gotten more expensive in the last decade with fewer insurers offering plans;  the demand will only increase as the increased amount of baby boomers are in retirement now.
In the creation and management of a comprehensive financial plan, it remains integral to consider the threats like long-term care costs to the safety of your long-term assets.

About the author

Tom Orecchio, CFA, CFP®

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