Who Should Self-Insure for Long Term Care?
September 07, 2016

Who Should Self-Insure for Long Term Care?

Q. My wife and I are considering whether to purchase a long term care insurance plan and, if so, what type. Our advisor has suggested considering asset-based long-term care. With this type of plan, we would pay the premium in a single payment, or over a three to five-year period. The upfront cost of asset-based long-term care insurance is high (We have been quoted about $220,000 each), but it has some advantages:

  • Guaranteed tax-free long-term care benefits if we need them
  • A return of premium if we change our minds during our lifetimes
  • A death benefit, assuming we haven't used up the long-term care benefits.

In other words, we wouldn't have to worry about premiums going up in the future and, if we don't need the benefits, our heirs, or we, could get some of the money back.

We are both 63, in good health, and plan to retire this year. My annual pension benefit will be $60,000. My wife's pension will be $50,000. Both will pay out 100 percent for both of our lives. I will be eligible for Social Security, but my wife (a teacher) will not.

We have no debts. Our assets are our house valued at about $600,000; $275,000 in cash; taxable investment accounts valued at $1.3 million; and IRAs and annuities valued at $1.6 million.

What do you think is our best option to provide for our potential future long-term care needs---a traditional policy, an asset-based policy, or self-insure? ---R.G., Dallas, TX

A. With a net worth of $3,775,000 you are a good candidate for self-insuring, particularly if you defer taking Social Security to maximize your guaranteed income. (By self-insuring, I mean using personal assets to pay for long term care if needed.) If your Social Security benefit is about $30,000 a year your total guaranteed income would be $140,000. If you check the most recent Genworth cost of care survey, it says that the median annual cost of nursing care in a private room in Texas is $71,175. So if both of you were in a nursing home at the same time your cost, about $142,350, would be very close to your guaranteed income. That’s before you sell your house or dig into the returns from your investment money.

In a semi-private room, your total annual costs would be $108,040, according to the survey— far less than your annual guaranteed income. And that ignores the possibility of home health care, which most people prefer, that costs far less.

Another thing to consider is the odds of needing long-term care and the potential expense. As you might expect, different studies come up with different numbers, so treat this as ballpark data. First, studies have estimated a lifetime risk of needing nursing care at 23 to 38 percent. So more people will escape nursing care than receive it. Second, according to a study in the Medicare and Medicaid Research Review, of all those admitted to nursing care, 78.3 percent stayed less than 2 years and 54.2 percent stayed 11 months or less. Only 21.7 percent survived 3 years or more.

Conclusion? Financial exposure, in the majority of cases, is limited. For example, there is a greater than 78.3 percent probability that a reserve fund of about $280,000--- enough for 4 years of care--- would be more than enough.

And while a financial exposure that size would be disastrous to most elderly people, your exposure is minor compared to your assets and guaranteed income. Indeed, self-insuring is probably a good risk for people with far less in assets than what you have.

Q. My 10-year-old grandson has shown an interest in stock and is gung ho to purchase Hilton. Okay!

Can you recommend reading material appropriate for his age? He is smart but short attention span and isn't crazy about reading. I am eager to help him and would like him to purchase mutual funds. I certainly respect your judgment. I would like this opportunity to share something with him besides cars! ---J.R., by email

A. Start him off with George S. Clason’s classic, “The Richest Man in Babylon.” It’s an easy read. It’s short. And it’s a story, not an equation.

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