Calculating The Cost Of Long-Term Care For The Not So Golden Years
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Calculating The Cost Of Long-Term Care For The Not So Golden Years

In November 2013 Joy Johnson ran her 25th New York City Marathon. Somewhere around mile 20 she tripped and dinged her noggin on the pavement. Bloodied but unbowed, Joy popped right back up and enthusiastically finished the race.

The next day Joy appeared, as she did every year, in the line for the Today Show, and enjoyed her annual brief chat with Al Roker. Her right temple sported a fat bandage, but otherwise Joy was bright and cheerful. Returning to her hotel in the afternoon, she lay down for a nap. And never woke up. Joy Johnson was 86 years old.

As sad as Joy’s passing was, there is a certain beauty in it. Full of health and vigor, she participated in the celebration of life that is the marathon, and then immediately caught the Express for the Pearly Gates the next day. Boom! Not for Joy the slow agony of a long, drawn-out decline over a period of years. Hers was a graceful exit.

“That,” I thought upon hearing the story, “is exactly how I want to go out!” But how many of us will be so fortunate?

Greater Longevity…and Greater Costs

Modern medicine is a wonderful thing. Combined with nutrition and lifestyle improvements, it has increased life expectancy in the US to 76 years for men and 81 for women. Many of us will manage to live even longer; the 2010 US Census recorded 53,364 Americans over 100 years old!

While that’s great news, here’s the downside: Not everyone will be as spry as Joy Johnson. More years = more time for things to break down. And they can break down big time the older we get. That’s when we start to need a little help with simple daily activities, and that’s where long-term care (LTC) comes in.

The US Department of Health and Human Services defines LTC as “services and supports necessary to meet health or personal care needs over an extended period of time.” This can range anywhere from someone coming to your house every day to cook meals and make sure you’ve taken your Geritol, to full-blown nursing home residency. Soberingly, the DHHS estimates that 70% of people turning age 65 can expect to use some form of long-term care during their lives.

LTC-type services are generally not covered by health insurance (including Medicare), so when such assistance is needed, the first line of defense is usually one’s family. When family members are unable to provide the support required, professional help may be needed.

The costs can add up quickly.The average cost per day for a skilled nursing facility in California in 2012 was approximately $226 ($82,500 annually). And again, most of it is not covered by health insurance.

Cost of long-term care insurance and you

Long-term care insurance is exactly what it sounds like: insurance to cover the costs of long-term care. You pay an insurance company a set monthly premium, and when you’re 87 and go tripping down the stairs and break half a dozen bones, the company pays for the multiple months (or longer…) that you’re stuck rehabbing in the nursing home (up to a lifetime maximum amount).

Simple, right? Well…..

Financial advisors disagree strongly about the value of LTC insurance. Some argue that it is an invaluable hedge against the uncertainties of age and infirmity; others believe most folks are better off “self-insuring” by saving specifically to cover such costs in retirement. There are valid arguments on both sides.

Does LTC insurance make sense for YOU? The maddening answer, as with so many decisions that involve predicting the future, is, “It depends.”

One Woman’s Evaluation

When I become one of the centenarians on the 2070 US Census, I want to be sure someone’s available to tune my hearing aid and find my Hurrycane. Given that I’m a single woman without kids (who would naturally be expected to perform these services in my dotage), it behooves me to think carefully about my prospects. I might be able to bribe one of my abundant nieces or nephews for the purpose, but I’d rather not have to do that.

The desire to avoid burdening one’s family is a huge factor when considering LTC insurance. There are several more.

Family history: How are Mom and Dad?

My father didn’t take the greatest care of himself, but he made it to 82 and was blessed with reasonably good health up to the final week of his life— the only time he spent in the hospital. Mom at 85 is still playing tennis, gardening, and walking the steep hills around her house. Her 90-year-old brother, a widower, beat cancer in his 80s and still lives by himself. And their younger sister, having battled a myriad of health issues, is still lively and feisty at 81.

This all bodes well for my centenarian ambitions

How’s your physical health?

I started running in my teens, took up bike racing in college, and naturally became a triathlete after college. I still work out twice a day and eat ridiculously well. Between my own good health and my family history, chances are good that I’ll live to a ripe old age *and* be fairly healthy for most of that time. I hope.

How’s your financial health?

If you anticipate retiring with a net asset value north of $4 million, it’s likely you can self-insure against extensive LTC costs with minimal concern about depleting your resources. Those of us uncertain about approaching such lofty financial heights, however, must think more carefully about the cost-benefit ratio of insurance.

Where will you live in retirement?

Care costs vary widely from state to state. I live in California, a notoriously expensive state, but I can’t see myself leaving when I retire. Ask me again in 20 years, but for now, the place where all my family and friends reside is where I plan to be.

Long-term care cost and your age

LTC premiums are cheaper if you start paying them when you’re younger, but you’ll be shelling out those premiums for a long, long time. Wait until you’re older to purchase a policy and your premiums will be higher, but you won’t pay them for as many years. Don’t wait too far into your 60s, though; your health by then could prevent your qualifying for coverage.

A big factor in the cost is whether or not you purchase built-in inflation protection. A higher up-front premium buys an automatic increase in coverage level at a set future date without an accompanying increase in premium cost.

Currently, at age 46, I can purchase a policy through my employer with premiums ranging from $22 per month to $160 per month, depending upon the level of coverage.

“Bottom” tier coverage provides:

– $100 per day maximum benefit

– $109,500 Lifetime maximum (equal to 3 years of the daily benefit)

“Top” tier coverage provides:

– $300 per day maximum benefit

– $547,500 Lifetime maximum (equal to 5 years of the daily benefit)

Mid-tier ranges feature benefit increases of $50 per day.

The chart below shows the increasing cost of my potential premiums at different ages/tiers:

Monthly/Annual LTC Premium Costs at Bottom and Top Tiers:

Purchase Age

Bottom Tier:
No Inflation Protection
Bottom Tier:
With Inflation Protection
Top Tier:No Inflation Protection Top Tier:With Inflation Protection


$22 / $264 $44 / $528 $76 / $912 $160 / $1,920


$40 / $480 $66 / $792 $138 / $1,656 $311 / $3,732


$80 / $960 $180 / $2,160 $272 / $ 3,264 $654 / $7,848

Paying those premiums year after year adds up. Let’s say that I sail along until I’m 80 with nary a problem, then Boom! I hit a speedbump and find myself in need of a little assistance. How much would I have paid out in premiums by age 80 under each of the above scenarios?

Premium Totals Paid by Age 80:

Purchase Age

Bottom Tier:
No Inflation Protection
Bottom Tier:
With Inflation Protection
Top Tier:No Inflation Protection Top Tier:With Inflation Protection


$ 8,976 $17,952 $31,008 $ 65,280


$11,520 $19,008 $39,744 $ 89,568


$13,440 $30,240 $45,696 $109,872

At first the cost-to-benefit ratio seems pretty good, especially if I get in early. For a little under $9,000 paid out over 34 years, I can access nearly $110,000 in coverage. That’s a 1-to-12 cost-benefit ratio, or an 8% return on my money. Not bad. Better still: an inflation-protected top-tier policy will cost a little over $65k over 34 years, but gains me coverage adjusted upward to the 2048 equivalent of $547,500 today. What a deal!

Or is it?

Return on Investment…?

All of the above assumes that my insurance company never arbitrarily raises rates on existing policies in those 34 years. Which some have been known to do. It also assumes I actually use my coverage.

What if I never hit that speedbump? What if, following Joy’s lead, I execute a definitive final faceplant at age 80 somewhere in, say, the lava fields of the Hawaii Ironman? I should be happy, right? I expended my last breath doing something I love, going out with a smile on my face, never having needed long-term care. But I lost the bet (and the investment).

Another possibility:

Let’s say that my Ironman faceplant is less than definitive; it’s only temporarily debilitating and lands me in a nursing home. After twelve weeks I’m hollering to get going. The nice folks there have had enough of me anyway, so they send me home. Hurray, I’m free!

But I’m also stuck with a $30,000 bill, payable by ME. Wait— didn’t I have insurance to cover this sort of thing? Well sure, but I was only in that nursing home for 84 days. LTC coverage doesn’t kick in until after day 90. Drat! So to make this bet pay off, I’d better be prepared to get good and sick, and stay that way for a while. Or it had better be my final exit.

The Long Goodbye

The final exit is where the LTC bet can truly pay off. We know that long-term care is expensive, but we have no idea how long we’ll need it at the end. That uncertainty makes insurance extremely comforting.

I imagine myself in a steady multiple-year decline, wasting away in a nursing home, babbling about my glory days on the Queen K and endlessly asking “How far to the next aid station?” If that goes on for three years (the average nursing home stay), I’ll rack up costs of $250,000 or more. Much more, no doubt, in 2048.

Without LTC insurance, my personal financial assets get to play a grim game of chicken with Death. Who will blink first?

From a purely pragmatic standpoint, this situation is probably more of a concern for (a) people with fewer financial assets than I expect to have; and (b) people with children counting on an inheritance.

I don’t expect to be vastly wealthy in retirement, but I hope to have enough to sustain a reasonably comfortable, secure lifestyle. In a final decline, gradually spending down those assets to pay for long-term care is not an unreasonable plan. But it’s still a game of chicken. As far as heirs, my nieces and nephews will get whatever’s left, but none of them is counting on a windfall from Auntie to keep them out of the poorhouse. I’m spared that pressure.

So where does this leave me?

Today, at 46, with excellent health and reasonable prospects for steady personal savings, I’m inclined not to take the LTC insurance bet. That doesn’t mean I won’t reevaluate in ten years, but right now, saving to self-insure seems like the right choice for me. If anything, researching the topic has sharpened my dedication to saving and investing; self-insuring for long-term care is now a key goal. Along with racing the Hawaii Ironman when I’m 80!

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Tricia Richter was born and raised in Silicon Valley. She graduated from one of the Bay Area’s two top universities, then went on to work for the other (her loyalties are utterly undivided when Big Game rolls around each fall, however). Having lived through the DotCom boom and bust, as well as the more recent financial crisis, Tricia has become an astute and dedicated student of all things personal finance and a firm believer in the slow-but-steady approach to building wealth.
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