Long-term care insurance: ‘Who needs it?’

Take-home message:

Money Matters By Traudy Grande, CFP; John J. Grande, CFP; and John S. Grande, CFP

“Not me,” you say!

You are young. You are healthy. You eat right, exercise, and get regular yearly physicals. Just a few of the reasons people today are living longer. In fact, since the 1960s, life expectancy has increased between 11/2 and 2 years each decade.¹

John J., John S and Traudy F. GrandeBut before you get too caught up in this good news, you may want to think about the future. What are the odds that you will enjoy this same level of good health when you are at the age of 80, 90, or even 100? Especially since about 70% of people over the age of 65 will require long-term care at some point.²

With people living longer, protecting your financial assets so that you will have enough money to last during your lifetime is just as important as accumulating them in the first place. But with health care costs rising every year, one illness or disability can wipe out a person’s savings due to ongoing medical expenses. According to Genworth Financial, a leading provider of long-term care insurance, the average cost for a private nursing home room in 2013 was more than $80,000 per year.³   

Footing the bill

Upfront, you need to know that Medicare doesn’t pay for long-term health care. It pays only for skilled nursing facilities or home health care that falls under the category of medical necessities.

While it may be possible to use savings to pay for long-term health care expenses, several factors enter into the picture. For example, you will need to determine how much money may be needed to cover those expanses. In order to figure out that dollar amount would require one to estimate the type and length of service that may be necessary.

Additionally, income and assets set aside for other retirement goals may be jeopardized if health care costs are higher than one expected. While you could invest for the potential expenses, investment risk may be a factor.

Putting money in a conservative account may not keep up with inflationary costs of health care. A more aggressive account may be affected by market downturns when money is needed.

Effective alternative

A potential, more efficient, and effective alternative is an insurance policy that would provide the dollars needed to cover long-term health care expenses. Consider some of the advantages:

Policy guarantees: A guarantee, backed by the claims-paying ability of the issuing company, provides the assurance that money will be available to pay long-term care expenses when needed.

Investment freedom: You would not need to be concerned with investment performance of assets set aside to pay expenses since an insurance policy shifts the responsibility for asset availability to the insurance company.

Leverage: The capital required to purchase insurance protection is less than that needed to pay for expense because of the leverage insurance provides. As a result, you may have additional capital.  

Tax benefit: Qualified long-term care insurance policies pay an income-tax-free benefit.

In addition to combining long-term care benefits and death benefits, some products even offer a return-of-premium feature, which ensures that if the policy is surrendered prior to claim, the original premiums paid will be returned to the policy owner.

References

• Source: 2011 study, Society of Actuaries
• Source: John Hancock 2011 Cost of Care Survey
• Source: “Here Comes the Next Health Crisis,” MSN Money, July 2013

John J., John S and Traudy F. Grande, CFPs, are the editors of Money Matters column. They are owners and principals of Grande Financial Services Inc. (www.grandefinancial.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise physicians across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at john.s.grande@wfafinet.com