Cost of not having long-term care insurance can outweigh cost of having it, not needing it
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Like their patients, physicians often become more concerned about long-term care coverage as they age.
For many, it is not until they reach their 50s or 60s that they truly begin to focus on the value this type of policy offers for themselves and their loved ones.
As professionals who often treat geriatric patients, physicians are likely all too familiar with the medical reasons people need long-term care services. Many have treated patients who have lost the ability to complete various activities of daily living (ADLs), such as bathing, eating, dressing and toileting, without assistance.
When patients or their physicians cannot independently accomplish these daily functions, supplementary care becomes necessary, whether in an assisted living or skilled nursing facility, or at home. Close to 70% of people turning 65 will need some long-term care (LTC) service in their lifetime. The yearly cost for full nursing home care can easily reach $100,000 and sometimes exceeds that. Whether the LTC services are necessary for just 1 year or many, the cost is high, which makes it a good idea to consider the value of buying insurance coverage.
When evaluating your unique situation and potential need for LTC coverage, it may be helpful to consider these questions:
- What would you do if suddenly faced with an additional yearly expense of $100,000 (higher in New York, California and other expensive states)?
- What if both you and your spouse need this level of care simultaneously?
- How would self-insuring LTC affect your retirement planning?
- How long could you afford LTC costs?
- How would this additional expense affect the estate you want to leave behind?
- How can you ensure that you maintain your financial security and independence?
- How would you answer these questions concerning your parents or in-laws?
LTC insurance market
There are two ways to secure LTC coverage: traditional LTC policies or hybrid coverage. The insurance industry started offering traditional LTC policies in the 1980s. Much like disability insurance, these policies offer a stated daily benefit. Should the policy be unused throughout the insured's life, there are no refunds or death benefits, so it is use-it-or-lose-it.
Hybrid coverage uses life insurance to provide the LTC benefit. One way is through a traditional death benefit product with a LTC rider allowing the insured to access the death benefit to pay for LTC expenses. The second way is to have a policy with a lower death benefit structured to offer a set benefit per month for LTC expenses. With this policy, the LTC benefit pays out monthly for as long as necessary and there is a death benefit upon the insured's death.
Comparing costs
Being concerned about the cost of LTC insurance makes sense. Yet it is equally important to look at the cost of not having this coverage. To do this, let us look at a married couple, John and Jane, and compare the impact of not having LTC insurance with the outcome using a hybrid LTC policy that also has a death benefit.
John and Jane are both 55 years old. They both plan to retire at 63 with a monthly retirement income of $13,000, including Social Security benefits. This income will grow by 2% yearly, making it slightly higher in 8 years when they retire.
They have $1.5 million in 401(k)s, $500,000 in IRAs and $1 million in a brokerage account. The annual contributions to all accounts total $63,500. Let’s assume here that they will live to 93 and those contributions will continue until retirement. Let’s also assume they earn a rate of return of 6% pre-retirement and 5% during retirement.
Scenario 1: John and Jane do not have LTC coverage and do not need it. John and Jane decide not to buy LTC coverage but to “self-insure,” understanding this means they will need to use their own assets to pay for any LTC needs. After living accident-free lives of perfect health and reaching age 93, John and Jane peacefully pass away with $3.6 million in assets, not including real estate and life insurance.
Scenario 2: John and Jane do not have LTC coverage and do need it. John and Jane decide not to purchase a policy and instead “self-insure,” understanding this means they will need to use their own assets to pay for any LTC needs. At age 85, one of them is diagnosed with an illness and needs LTC for the next 8 years. The cost of the assistance is $8,000 a month. The couple must liquidate assets to pay for the care and when they both pass away at 93. They leave behind $273,000, a decrease of $3.35 million, which ends up being the total cost of the risk they took in self-insuring.
Scenario 3: John and Jane buy LTC coverage and do need it. John and Jane realize the odds are relatively high that one of them will need LTC assistance after retirement, so they purchase a policy. At age 85, one of them is diagnosed with a long-term illness and needs LTC for the next 8 years. The cost of the assistance is $8,000 a month. Because they have LTC coverage, the only cost they pay is in the premiums, so when both pass away at 93, they leave behind assets totaling $2.63 million — almost $2 million more than if they had self-insured.
Scenario 4: John and Jane buy LTC coverage and do not need it. John and Jane realize the odds are fairly high that one of them will need LTC assistance after retirement, so they purchase a policy. They decide to get a hybrid policy, so there is a death benefit attached to the policy. After living accident-free lives of perfect health and reaching age 93, John and Jane both peacefully pass away with $2.89 million after the death benefit payout on the hybrid policy.
LTC insurance does not just protect an insured's ability to get care; it protects their assets. It reduces the risk that an individual will need to use their savings and cash flow to pay for their LTC needs and ensures that their assets can be there for loved ones after they pass.
Conclusion
As shown in these scenarios, the cost of not having LTC insurance can far outweigh the cost of having it and not needing it. While everyone’s need for LTC will not exactly align with one of the four scenarios outlined in this article, it is likely that the need for these services will impact nearly every physician’s family in some way. It is important to work with an experienced advisor who can help you analyze your options for LTC coverage and evaluate its impact on your overall wealth planning. The authors welcome your questions.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to (844) 418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Michael Lewellen is a partner and director of financial planning. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mandell and Lewellen can be reached at mandell@ojmgroup.com or (877) 656-4362.
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