The need to receive some type of long term care services will be a reality for more than 70% of individuals over the age of 65. But, understanding the true cost and impact of requiring these services are often underestimated.
According to Genworth Financials 2011 Cost of Care Survey the average annual cost for semi-private nursing home care throughout the United States is $70,445, and has increased by 5% on average over the past six years. The same survey indicates Home Health Aides Services averages $43,472 per year (assuming a 44 hour work week), with an average increase in cost of 1% over the same six year period. The following table outlines the average cost for long term care based on the indicated services:
Median Annual Rate
Six-Year Annual Growth
|Home Health Aide Services||$43,472||1%|
|Adult Day Health Care||$15,600||N/A|
|Assisted Living Facility||$39,135||6%|
|Nursing Home (Semi-Private Room)||$70,445||5%|
|Nursing Home (Private Room)||$77,745||4%|
These average costs are based on 2011 rates. If we apply the median annual rate and project it over a 30-year period based on the Six-Year Annual Growth Rate the cost becomes formidable.
The purpose of this chart is not to scare you, but to make you aware of what the true costs will be. It is more important to consider what the cost of long term care services will be when you need them versus what it would cost to receive care today.
Now, let’s evaluate what the costs would be to purchase a traditional long term care insurance policy versus making the choice to self-insure or self-fund a long term care scenario. For each scenario will use the same fact pattern.
Assuming the cost of semi-private nursing home in 30-years will be $304,459, and the average long term care event last 3 years, we will illustrate each scenario by funding for a total need of $913,377. We will assume the individual in each scenario is 55, and will begin receiving care at age 85 for a period 3-years.
In order to compare each scenario we will begin by using a traditional long term care insurance policy. The long term care insurance policy will provide $200 of daily benefit (this is $7 more per day than the current daily average of $193), 5% compounded inflation, a 3-year benefit period, and a 90-day elimination period. We will also assume the individual will pay premiums over their lifetime, and that they are currently single. Because the individual is single we will not be able to apply any discount to the long term care insurance policy.
Note: This example does not take into account any future rate increases for long term care insurance coverage.
Based on the abovementioned assumptions the annual lifetime premium for the long term care insurance policy is $2,709 per year. The benefit pool available 30-years from now is $901,434. If we took the same $2,709 per year and invested it in a reserve account to cover long term care costs we would have to earn a gross rate of return equal to 13.65% annually to have $902,215 in 30-years. Assuming an 8.00% gross annual rate of return you would have to put away $8,000 per year to have $906,266 in 30-years. In each scenario we have not consider any taxation that may occur on investment returns.
Purchasing Long Term Care Insurance versus Self Insuring provides the details of this information.
What are the Pros and Cons of Each Approach?
The benefits of purchasing long term care insurance are that you will have access to policy benefits regardless of when your long term care event occurs. If you experience a long term care event today you will have access to all of your benefits. When you self insure you will only have access to the benefits you’ve accumulated. It will also provide you with a plan of care and guidance through the entire process.
The cons of purchasing long term care insurance are you may never us it. Of individuals over the age of 65, 30% will not require long term care services. The rebuttal to this is that you are less likely to get in a car accident or experience a home fire, but you still insure against either of these risks ever occurring.
The benefits of self insuring is that if you don’t require long term care services the money you’ve accumulate transfer to your heirs. If you do require care the savings you’ve accumulated can have a significant impact on your financial net worth. Your family may be required to coordinate care and/or provide a majority of the care you may need.
As with any situation where we use an example to emphasize a point we encourage you to take a look at your own personal scenario, and design a plan based on your needs. Long term care insurance can be a great option for most people, but in some cases there are situations where it may not be a fit at all. To learn more about your options we encourage you to contact us at (877) 402-2235 or complete our long term care insurance quote request.