Long Term Care Insurance

in Personal Finance Essentials by

Long Term Care Insurance is an important consideration for many who are nearing or in retirement. It is an area that is very poorly understood, largely because most people don’t want to think about it. The goal of this article is to provide some helpful guidelines, but because long term care is a personal decision, it stops short of any recommendations.

Like any insurance, it helps to have a sense of the odds of needing it.

According to a website developed by the US Department of Health and Human Services:

  • 70% of people over 65 will require at least some type of long term care service in their lifetime.
  • Over 40% will need care in a nursing home for some period of time.
  • The average person who needs some type of long term care requires three years of assistance.
  • Women average 3.7 years, and men only 2.2 years.
  • 20% of today’s 65 year olds will require care for more than 5 years.

The problem with this data is it doesn’t break down the severity of the care needed very well and some of it includes home based care that is given by family or friends. We do know that about 35% of people who enter nursing homes stay for between 1 and 5 years while 20% stay for longer than 5 years. This means about half stay for less than one year.

According the same website:

  • One year of care in a nursing home in a semi-private room costs an average of $68,000 per year.
  • One year of service from a periodic home health aide averages $18,000 per year.

Assuming you would want to remain in a high cost of living area or want better than average conditions, assume a higher amount than these figures.

Putting this all together, we can assume roughly a third of people will require care that exceeds $100,000.

Expenses over $600,000 do occur, but are somewhat rare, probably for less than 5% of people. If spending this amount would be manageable for you on your own, you probably don’t need the insurance.

Who Pays For Long Term Care?

Usually, you do, not Medicare or Social Security. A lot of people don’t realize this.

Medicare does not pay for long term care, nor does standard medical insurance. Medicaid will often pay for much of it, but usually only once all of the person’s assets are depleted.

Who Should Consider Long Term Care Insurance?

Long term care is a personal issue that requires an individual solution, so we are unable to offer detailed opinions here. A common belief is that if you have less than $250,000 or more than $1,500,000 in liquid savings, LTC Insurance does not make sense. There is some logic to this.

Remember that, like all insurance products, the odds are stacked against you and most likely you will pay more than you benefit. You are insuring against a very bad scenario.

If you have less than $250,000 saved, making long term care insurance payments will noticeably dent your lifestyle in retirement. While it could end up saving you some money, it is too expensive relative to spending down savings and relying on Medicare for the rest.

If you have more than $1,500,000, paying several hundred thousand in long term care expenses would be unfortunate, but would still leave you in a decent position. Typically, at the point you are relying on long term care, your other discretionary expenses usually drop.

Another important question is when to start thinking about long term care. Premiums are, of course, cheaper if you start paying earlier, but for most people it probably does not make sense to worry about this before about age 45 or so. In most cases, premiums can be increased over time, so there is rarely a large benefit to starting too early.

Statistics show single people tend to utilize the insurance more, but they also may not care as much about depleting their assets at the end of their life, so this becomes a personal preference issue.

If you have children, it is worth it to discuss it with them, as unpleasant as it may be. Ultimately, they will likely have a lot at stake in the decision.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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