Today, I want to talk about long-term care and long-term care insurance. Long-term care is usually toward the end of life during that hard transition when we no longer can do things for ourselves.
Typically, long-term care insurance kicks in when we can't do at least two of the five major duties of life or care duties for life - things like dress ourselves, feed ourselves, or bathe ourselves. When we start to fail to be able to take care of ourselves, it's at that stage of life that we're talking about.
Starting the Conversation Early
Statistically, if I have two healthy adults at age 40, one in four of those people is going to require long-term care at some point in their lives.
By the time you reach 60 and 65 years old, those statistics are now getting closer to 50% of us are going to need some form of long-term care at one point or another.
Who Needs Long Term Care Insurance (Net Worth)
Now, when we think about how to cover that cost, or if we even need to cover that cost, there's a question we always start with.
To the surprise of some, the question is not, "Will we need to cover that cost for one of you?"
It's really a question of, "Can we cover the cost for one of you and then still have enough money to care for the survivor?"
So that's where long-term care insurance comes in, is to try to offload some of that risk.
If your net worth is above $10 million, very often the conversation is, "Hey, this is a risk that we can bear ourselves." In fact, the threshold may even be a little bit lower than that, but not by much.
For most of our clients whose net worth at retirement run up to about $7-8 million, we're typically looking to offload some of this risk onto an insurance company.
How Long Term Care Insurance Has Changed
For a very long time, since about the 1980s, long-term care insurance companies issued policies just like they issue policies today. You take on an annual expense, kind of like you would with your homeowners insurance, and you pay a premium each year.
The problem that this was a relatively new kind of insurance in the 1980's, and the insurance companies didn't have a whole lot of experience.
Well, 40 years later, they've got a lot more experience and they have figured out that they didn't price these products very well. They were issuing these to people in their 30's, 40's, and 50's, and those people are living longer and longer. As a result, the insurance companies are getting crushed. Their cost for providing this care is way more than the premiums they charged on the way in.
The Fallout of Bad Insurance Company Risks
Now, there's two things happening.
- Where they can, they're going back and they're raising premiums on existing policy holders.
- They are substantially raising the premiums on new policies that they're issued, and they're removing that language that may have guaranteed that premium to be level for life.
Now we're getting policies that are more expensive, often provide less coverage, and offer no protection on future premiums. There's no safe guard that insurance companies won't raise the premiums down the road if they get in a hole and they haven't properly underwritten these policies.
Avoiding $100,000 Annual Costs
The challenges is that statistically, a lot of us are going to need this kind of coverage. Not a high percentage of us can afford to just stroke a check for what may be $100,000, $150,000, or even $200,000 a year from our net worth. We can't expect to have enough money left over to take care of a spouse who survives us.
If we're writing a check for somewhere between $100,000 and $200,000 a year for four to six years, that's going to put a big dent in most people's net worth. What we look at today is typically offloading this risk through some form of a hybrid insurance product.
This may be an annuity that has a long-term care rider on it. It may be a life insurance policy with a long-term care rider on it. It also could be some kind of hybrid of all three of these kinds: annuity, life insurance, and long-term care.
Creative Solutions to Complicated Needs
We're typically looking to tie up a portion of the net worth in an investment vehicle that's going to do two things.
Goal 1: If there's a long-term care need, that insurance policy is going to pay off and help us offset some or all of the cost of the long-term care stay.
Goal 2: If we don't have a need for the long-term care during your lifetime, then upon death, there's a death benefit that comes back into the estate.
Now that really helps us when we do that on each spouse, because that way, if we don't need it on the first death, that money comes back into the estate on that first death to help the surviving spouse remain more solvent financially after that first death. Then upon the second death, the same thing would happen.
It would be another insurance payment back into the estate to go to the heirs, often our kids or organizations that we care deeply about.
This is some of the change that we've seen over the course of the last 10 to 15 years in how we approach long-term care and long-term care insurance in planning for our clients. If you have any questions, as always, please feel free to reach out to us. We're always here with perspective for the decisions ahead. Take care.