People’s concern over the future cost of long term care services is valid. Most of us have a friend or relative who has received some form of care, and recognize the financial and emotional strain this can have on loved ones. Although many people recognize they will have a need, many don’t do anything to address it. Considering a long term care insurance policy to eliminate some or a majority of this risk can be a valuable approach to having a plan in place.
When considering what approach you and your family might take to a long term care event you essentially have three options; (1) self-insure or self-fund, (2) insure the entire risk, or (3) insure a portion of the risk and plan to pay some of the costs out of pocket.
By making the choice to self-insure an individual can count on having to paying out more than $70,000 per year for a semi-private nursing home room. This is in today’s dollars. Based on increases in the cost of care an individual can expect to pay out more than $185,000 per year twenty years from now. Now, if your plan is to use retirement assets (e.g. 401(k), IRA, or other pension assets) you will have to take into account taxes paid on any distribution. Assuming a 30% tax bracket an individual would have to distribute more than $260,000 to net the $185,000 needed to pay for care. A mistake many individuals make when thinking about long term care is that their current living expenses stop. This is not the case. What if you still have a mortgage on your home? Also, what if you have a spouse that may not need care, but will still require the use of family assets for years to come.
Long term care insurance can play an important role in assisting families with covering the expenses of a long term care event and provide valuable caregiver support and resources to assist the insured in maintaining an independent lifestyle. There are a number of different ways to design a policy that will ultimately affect the benefits received and the cost of the policy. Some families may want to insure the entire risk. This is easy to do and can be very cost effective. Other families may be interested in taking on some of the risk (or expenses), while putting some of the risk on an insurance company. This will reduce the premium of the policy, but will increase the cost paid out of pocket in a situation where a long term care event occurs.
Let’s say you are in a situation where you could afford to pay for the cost of care today, but you are concerned about increases in the future cost of care. You should consider a policy with a smaller benefit that includes some form of inflation protection in order to reduce your exposure in the future. Depending on the inflation protection option, generally 3% or 5% compounded, you can back into a benefit amount that will cover the cost different in the future.
For instance, to insure the entire risk today you would likely consider a policy with a $200 daily benefit with 5% compounded inflation. Based on your family needs you would determine a benefit period (or period of time you would like have access to the benefit amount), and would design a policy based on this fact pattern. If you were only interested in insuring against future increases in the cost of care you should consider a policy with a $120 daily benefit with 5% compounded inflation. In twenty years, the policy will provide approximately $115,000 of benefits per year. The difference between the future cost of care ($185,000) less the cost of care today ($70,000) is $115,000.
By utilizing long term care insurance you can preserve your assets, reduce the emotional strain on family members, and in most cases have access to a care coordinator. A care coordinator can evaluate an individual’s need for care and service, identify what services are needed and what care providers are best suited to provide them, and identify and recommend future care needs.
Most policies are not limited to nursing home care. In fact, a majority of policies today cover all levels of long term care, including home care. In many cases, the cost of 24-hour home care will be about the same as it would for nursing home care.
Long term care planning can be sensitive and unique process. It is important to have an open conversation about what your individuals need are and design a plan around those needs. Working with a long term care insurance professional can provide value and insight to the planning process. To learn more about customizing a solution for you and your family, please complete our long term care insurance quote request.
