The question of what long term care insurance policy is right for me and my family can be difficult to answer. People often find themselves balancing budgetary constraints versus what benefits they would like their policy to include. In a perfect world we would have unrestricted access to funds to cover this need on our own, but absent of significant liquidity this can be a challenging task.
Instead of designing a plan on your own it is important to work with a long term care insurance professional who can guide you through the process. If you have a budget, let them know up front what it is, and see if they are able to make recommendations that will accomplish some, if not all, your long term care planning goals.
One of the key elements to long term care insurance planning is where you intend to receive care. Is it where you live now or will it be in another state? This question should be the first step in designing a long term care insurance policy. Why? The cost of long term care services varies drastically depending on what state, and in some cases, what county you receive care.
For instance, the most expensive state to receive nursing home care is Alaska and the least expensive state is Texas. The average annual cost of receiving nursing home care in Alaska is more than $220,000 per year, while the cost for the same type of care in Texas is just over $46,000 per year. This is a huge difference. Overall, the average cost of nursing home care throughout the United States is just over $70,000 annually.
How will this Affect How I Design my Long Term Care Insurance Policy?
When designing a long term care insurance policy the first thing most people do is choose a daily benefit. The daily benefit is the maximum amount of money available to reimburse for long term care expenses. If you were to insure your entire long term care risk based on the U.S. average cost of nursing home care, you would want a daily benefit of $190 ($70,000 divided by 365 days). In order to determine what the daily cost of care in your region would be you could either contact us by requesting a long term care insurance quote or contact a few nursing homes in your area to determine what the actual cost of care would be.
When doing long term care insurance planning the higher the daily benefit you choose, the greater the cost. It’s just like anything else. The more you buy, the more you pay.
What is the Cost of Underinsuring?
In order to determine the true cost of underinsuring we have to make a few assumptions. For purposes of this example we will assume the insured is age 50, and is trying to decide if they should purchase a $100, $150, or $200 daily benefit policy. Each policy will have 5% inflation (to keep up with increases in the average cost of annual care), a 3-year benefit period, and a 90-day elimination period. We will also assume the insured will require nursing home care at age 85 for 1-year, and the average cost of nursing home care where the insured will receive care is $200 per day.
The following information provides a breakdown of the annual policy cost (to be paid every year) for the daily benefits indicated above:
|Daily Benefit (Today)||Annual Premium||Premiums Paid to Age 85||Daily Benefit (Age 85)|
Based on an average daily cost of nursing home care today of $200, increasing at 5% per year, the average daily cost at age 85 will be $1,050 per day. This equates to $383,250 per year.
If you purchased the policy with $100 daily benefit when you were 50 and you now required one year of nursing home care at age 85, you would have to pay $525 per day out-of-pocket to pay for the shortfall between the benefits you receive from the long term care insurance policy and the actual cost of care. This would cost you more than $190,000. If you opted for the $150 daily benefit it would cost an additional $260 per day out-of-pocket, or just under $95,000 for that 1-year of nursing home care.
In this example, the cost of purchasing a long term care insurance policy for $1,500 versus $750 per year would have saved the insured more than $135,000 during their lifetime.
Understanding this example isolates a specific fact pattern, it undoubtedly demonstrates the power of obtaining the coverage that will insure your entire long term care risk. Unfortunately, most of us don’t have unlimited amounts of money to pay long term care insurance premiums. In most cases, it is more important to have some level of coverage as opposed to none at all.
To discuss your particular situation and what options might be available to you please request a long term care insurance quote. Our independent and objective advice can provide you with a better understanding of what options are available, and how you can accomplish some, if not all, your long term planning goals. Check-in next week as we review the affects of choosing a suitable inflation protection rider.