Consider Long-Term Care Insurance as Part of Your Financial Plan

• As of 2013, the average cost nursing home care ranged from $80,000 per year to more than $300,000 per year.
• Americans face approximately a 1-in-10 chance of spending at least 5 or more years in a nursing home after age 65.
• It is best to simply consider long-term care insurance as part of your estate plan, as you would life insurance.
• Best to buy long-term care insurance when you are at peak earning and when you are young..

Nearly every investor knows that the costs of long-term and short-term medical care are soaring. Increases in medical costs have been significantly outpacing those of increases in wages, increases in other prices, and the growth of the economy in general. These costs, if not properly planned for, can wipe out retirement funds and significantly impair your ability to leave money to future generations. (See Figure.)

This is why we want you to think of planning for your long-term healthcare as a central aspect of your estate-planning. It is folly to rely on the state or Federal government to provide medical coverage and a comfortable retirement. When it comes to your long-term financial well being, and that of your family, it is imperative that you recognize the role that paying the costs of long-term care for you or a relative will either be paid in cash by the family, or will be paid for in a pre-agreed manner by an insurance company through a long-term care insurance (LTCI) policy. We suggest that is essential that you use LTCI as part of your planning.

Long-term care insurance is considered a type of health insurance because it pays for a variety of health costs that may or may not be covered by Social Security, Medicare, or your state plan. Given how rapidly these expenses have grown, it is conceivable that prices will rise to between $100,000 and $200,000 per year on average for nursing home or in-home care for many people in the United States. With current medical expense inflation rates of 5% to 10% per year, a $200 per day nursing home in year-2014 dollars would cost more than $500 per day in 2020 dollars.

Do You Need Long-Term Care Insurance?

According to the Center for Long-Term Care Financing, Americans face approximately a one-in-10 chance of spending at least 5 or more years in a nursing home after age 65; 48.6% of people aged 65 and older may spend time in a nursing home. Of people aged over 65, nearly 62% use some form of home-health care. Increased costs and longer lifetimes can create enormous medical bills. (See Table.)
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Long-Term Care Insurance as Estate Planning

Nursing home care costs in most cities in this table fall between $5,000 and $8,000 per month. Some are as inexpensive as $4,000 per month and some can cost more than $10,000 per month, often paid for with after-tax dollars. We can see no good reason to expect that overall medical and nursing home care costs will decrease. Certainly, it seems a bad bet to leave it to chance when you can control and manage the expenses through the proper use of LTCI.

Medicare will pay for certain aspects of long-term care under certain circumstances, for limited periods. However, it is safe to say that you will not be able to rely on government insurance only in order to insure against the costs of a long-term disability in such a way that you are cared for in comfortable conditions.

The states pay for long-term care in significantly variable ways. In some cases they require that the recipient have a net worth that is close to zero before he or she becomes eligible for state-assisted care. It isn’t difficult to see how LTCI can be part of your estate planning.

You are likely already willing to purchase insurance, create a living trust, and consider other estate-planning strategies. You should certainly consider long-term care planning. As you shop for LTCI, we feel that it is important that you consult with a professional who knows the variety of long-term care benefits offered by private and government entities, and the conditions upon which those benefits can be administered.

When to Buy, and What?

You can get the greatest value from LTDI at two points in your life: when your earning power is the greatest, and now, or the earliest time from right now that you can purchase the policy. The sooner you buy it, the less expensive it will be. There are two reasons for this: 1) If you purchase the insurance at the time in your life near where you are most highly compensated, you may be able to purchase a policy with a greater benefit value, and 2) The cost of LTCI is lower for younger people.

By purchasing LTCI, you are shifting the financial risk to a business entity that is outside your family—the insurance company, and the insurance products themselves can be very flexible. For instance, you can purchase the policy over a varying period of time, say over a year, 10 years, over 20 years, or through some other arrangement. The insured has the options to have all of the premiums go to the heirs at her death even if she had collected on the policy during her lifetime. As interesting innovation, there are policies on the market that combine a universal-life insurance guaranteed death benefit for the heirs with a guaranteed daily benefit to pay for long-term care costs for the insured. This can be an ideal tool to achieve two planning goals.

For more on this topic, or if you have questions about insurance or estate planning, contact Mike Berry at Ask Mike. He was recently named one of the “150 Best Financial Advisers for Physicians” by Medical Economics. He is a member of the advisory board for MDalert.com. You can reach him at mberry@msf-advisors.com or 855 449 7100.