The cost of long-term care can be very high. Nationally, a
one-year stay in a nursing home averages $87,000, though it can be
significantly higher in certain parts of the country. The average in the
New York City area, for example, is $136,000 per year, and is even
higher in Alaska. In-home care, while cheaper, can still run around
$50,000 per year or more.
It's often said that the rich don’t need long-term care (LTC) insurance, as they can afford to self-insure. It's also said that the poor don’t need it as they will be covered by Medicaid and other such programs. That leaves the middle class as the best candidates for this coverage. Here are few thoughts on long-term care insurance and how financial advisors can help their clients decide if this is the best route for them. (For more, see: Medicaid vs. Long-Term Care Insurance.)
If one spouse developed a medical situation requiring a stay in a nursing home for several years, even at the national average cost of $87,000 per year, this could deplete the couple’s retirement savings in a hurry. Having long-term care insurance in place could certainly help offset some or all of this expense and preserve the couple’s nest egg.
For most policies the premiums are not fixed. In Illinois a few years ago a large issuer of long-term care policies raised premiums in an aggressive fashion. In this case they were going after policyholders with a 5% inflation rider. They offered to keep premiums the same if the insured would drop down to a 3% rider, otherwise the increases ranged from 20% to much higher. (For more, see: A New Approach to Long-Term Care Insurance.)
Premium hikes will likely not be uncommon going forward, as many insurers did not count on people living as long as they are. (For more, see: How Advisors Can Help Address Longevity Risk.)
An inflation rider is often a good idea as the cost of healthcare in general and long-term care costs specifically seem to increase faster than inflation.
Another decision is the length of benefit coverage. Lifetime protection, protection for five or three years are common. The length of the period of consecutive days of eligibility for benefits until coverage starts can also influence the cost. A longer elimination period (180 days versus 90 days, for example) will reduce premiums. (For more, see: Financial Advisor Client Guide: Long-Term Care Insurance.)
It's often said that the rich don’t need long-term care (LTC) insurance, as they can afford to self-insure. It's also said that the poor don’t need it as they will be covered by Medicaid and other such programs. That leaves the middle class as the best candidates for this coverage. Here are few thoughts on long-term care insurance and how financial advisors can help their clients decide if this is the best route for them. (For more, see: Medicaid vs. Long-Term Care Insurance.)
What is LTC Insurance?
Long-term care insurance, like any type of insurance policy, is protection against some event that would be too costly to fund out of one’s pocket. Let’s say a married client had a $1 million retirement nest egg, which along with their Social Security and a small pension, provided an amount sufficient to support their retirement lifestyle. (For more, see: What is Long-Term Care Insurance?)If one spouse developed a medical situation requiring a stay in a nursing home for several years, even at the national average cost of $87,000 per year, this could deplete the couple’s retirement savings in a hurry. Having long-term care insurance in place could certainly help offset some or all of this expense and preserve the couple’s nest egg.
Preserving an Inheritance
For many families providing an inheritance to their children, grandchildren and others is a priority. Long-term care insurance can provide a source of funds to pay for needed care. The money paid by the policy represents funds that an individual will not have to pay out of pocket and in this case can potentially be preserved to pass on to their heirs as desired. (For more, see: Leaving Inheritance to Children: Easier Said than Done.)Getting the Care Needed
People are more likely to get the care they may need if they have the means to pay for it without ruining the financial situation of loved ones. This alone would seem to be reason enough to consider long-term care insurance. (For more, see: Taking the Surprise out of Long-Term Care.)Premiums
While annual premiums can easily be in the $3,000 to $6,000 range, this equates to the cost of less than one month in a nursing home based on national averages. (For more, see: How is My Insurance Premium Calculated?)For most policies the premiums are not fixed. In Illinois a few years ago a large issuer of long-term care policies raised premiums in an aggressive fashion. In this case they were going after policyholders with a 5% inflation rider. They offered to keep premiums the same if the insured would drop down to a 3% rider, otherwise the increases ranged from 20% to much higher. (For more, see: A New Approach to Long-Term Care Insurance.)
Premium hikes will likely not be uncommon going forward, as many insurers did not count on people living as long as they are. (For more, see: How Advisors Can Help Address Longevity Risk.)
Riders and Elimination Periods
Choosing among all of the various features available with today’s long-term care policies is akin to shopping for a car. Do you want cloth or leather seats, a premium sound system, etc.? (For more, see: Considerations for Long-Term Care Coverage.)An inflation rider is often a good idea as the cost of healthcare in general and long-term care costs specifically seem to increase faster than inflation.
Another decision is the length of benefit coverage. Lifetime protection, protection for five or three years are common. The length of the period of consecutive days of eligibility for benefits until coverage starts can also influence the cost. A longer elimination period (180 days versus 90 days, for example) will reduce premiums. (For more, see: Financial Advisor Client Guide: Long-Term Care Insurance.)