It shouldn’t come as a surprise that health care costs are among the leading concerns on people’s minds when nearing retirement.
The average couple retiring in 2014 can expect to pay $220,000 to $240,000 in health-care costs during the course of their retirements, according to a new estimate from Fidelity Investments. As if this weren’t scary enough, lost in the fine print is the fact that this figure doesn’t include long-term care.
Long-term care costs can vary widely by type of care and location. A single room at a nursing home facility will cost on average close to $88,000 a year, with a typical stay of approximately four years. Part-time in-home care by a home health care practitioner will cost considerably less. Regardless, everyone should have a long-term care plan in place. Are there ways to prepare for these variable and unpredictable costs?
The good news is that there is long-term care insurance (LTCI), and like any insurance, it’s cheapest to buy when the insured event is more likely further in the future. In other words, buy early.
Traditionally, LTCI was best suited for those with a net worth between $250,000 and $2 million. This group could afford LTCI premiums and had significant assets to protect for their family. Also, they didn’t possess adequate resources to self-insure. For individuals with net worth above $2 million, the general rule was to self-insure. Today, in light of rising long-term care costs and people living longer, this traditional approach to long-term care coverage warrants re-evaluation. In fact, everyone should at least consider LTCI for one or more of the following reasons:
1. To avoid being a burden
None of us want our future health-care needs to create a physical or emotional strain on family members. This is true regardless of net worth. And this emotional side in particular is one of the leading reasons high net-worth individuals consider long-term care insurance.
One way to reduce family “burden,” even the psychological impact, is to have long-term care benefits available. For some, such benefits mean a greater range of options. Families with long-term care coverage tend to seek outside professional help sooner and with less family conflict. In addition, opportunities are enhanced to remain at home with professional in-home care.
According to the American Association of Long-Term Care Insurance, over 50% of long-term care insurance benefits in 2011 were paid for in-home care. Most people prefer to stay in the comfort of their own home as long as possible. LTCI benefits often allow this to happen as professional in-home care can be started sooner and provided at a higher level.
2. To protect family finances
Individuals work a lifetime to accumulate assets. They build a net worth and spend considerable dollars protecting assets against taxes, estate costs and family issues. They plan for a happy and healthy retirement and hope to leave an inheritance to their family. However, many fail to plan for long-term care costs.
Why is this? Some are unsure where to start the process, or hope family members will help when the need arises. Others believe premiums are too cost prohibitive. In 2012, AARP stated, “high premiums keep most people from purchasing insurance. Yet, for those who own long-term care insurance and receive benefits, the policies pay for a significant portion of care received.”
This creates a financial dilemma. People want and need the long-term care benefit, but are unsure if the premiums are worth it, especially if cash flow is tight. Fortunately for high net worth families the cost of premiums is less likely to cause significant burden in their annual cash flow. Premiums may also be partially tax-deductible, which makes the insurance even more cost-effective. For these reasons, long-term care insurance should at least be considered as one part of a comprehensive strategy to protect family assets.
A couple with a net worth of $1 million could spend their life savings very quickly if they have to cover the cost of a severe illness. For example, with one spouse in a long-term care facility for Alzheimer’s and the other living at home, in four to five years the couple could easily deplete their entire savings.
3. To provide liquidity
Some business owners have significant net worth, but minimal liquidity and cash flow. Farmers, for example, may have high land value assets, but the majority of their cash flow goes back into the operation of the farm. Other business owners may hold significant wealth in non-income producing assets, or assets that are difficult to sell due to tax consequences or an illiquid market. In these situations, long-term care insurance can reduce out-of-pocket health care expenses and protect cash reserves for day-to-day living and business costs.
4. To obtain peace of mind
As stated earlier, most people purchase long-term care insurance for emotional reasons. Numbers and dollars are important, but so is peace of mind. With a net worth over $2 million it may be possible to self-insure, but that doesn’t mean these individuals want to self-insure, or that it is the best solution for their situation.
Most affluent clients built their wealth by understanding risks and planning accordingly. They understand the importance of numbers, but also rely on emotional clues and input to make wise choices. This same approach is advisable when considering long-term care insurance. Each individual or family must look at the risks, costs and benefits involved, and then determine if long-term care insurance is a smart way for them to achieve peace of mind.
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