Thing #2: Some Thoughts on Long Term Care Insurance
There is no doubt about it, paying for Long Term Care can get EXPENSIVE.
With life expectancy increasing and the world's population aging at a faster rate than ever before, an eventual stay in a long term care situation is becoming more and more likely.
According to Genworth, here are some of the median monthly costs associated with care:
- In-home care: $4,290/mo
- Assisted living facility: $4,051/mo
- Semi-Private Room in Nursing Home: $7,513/mo
- Private Room in Nursing Home: $8,517/mo
At those rates, we're looking at an increased annual expense of anywhere from $50,000-$100,000. As you can see, it could only take a few years to wipe out a retirement nest egg if you're under-prepared.
[Enter Stage Left] Long Term Care Insurance
Because the cost of care can be huge, it's often widely recommended that individuals buy Long Term Care Insurance to cover these costs if they arise.
The common idea with a LTC policy is that you buy it when you’re healthy and young (relatively, young), like at age 50 or 60, and pay a fixed premium for many years. If you keep up the payments then the insurer can’t deny you coverage if your health deteriorates. When you need and qualify for care, the policy will cover a certain amount of the cost, like $300/day for 3 years (or something like that).
But here's the problem:
The insurer can typically raise the premiums in the future, while offering the same benefit.
I'll say that once more for the people in the back...
You can spend years and years paying your premiums only to have the insurance company decide you need to pay more to keep your existing benefit, or you can pay the same and receive a lower benefit. What?
Honestly, I get why the insurer has to re-calibrate these policies; the actuaries who designed them wouldn't have anticipated the the cost of care to rise at 3x that of the overall rate of inflation. They also may not have expected people to live as long as they have been.
For this reason, you need to be careful when evaluating whether long term care insurance makes sense for you.
You might be saying, "But Adam, doesn't Dave Ramsey recommend that people buy long term care insurance?"
Yes he does, and he's absolutely right.
However, Dave Ramsey also has noted that he himself does not have LTC coverage.
Why? Because he's built enough wealth to be self-insured.
This is my goal for every client I work with:
Build enough wealth to self-insure against a long term care situation.
If you're wealthy enough, then the potential impact of heightened care costs is limited to a lesser estate and legacy left to your heirs.
For those with limited means, it can reasonably be assumed that Medicaid will cover their stay.
The middle class is at the highest risk of LTC impacting their family significantly.
To be clear, the situation we're looking to avoid is one where a married couple sees one spouse needing care, while the other is still healthy. The spouse needing care spends several years in a facility and the high costs drain the couple's assets. Then later on, the surviving spouse has limited resources remaining for their own lifestyle or care.
Like every other financial planning application, this scenario requires making a ton of assumptions (guesses) about what the future cost of care will be, rates of inflation, premium increases, longevity, etc. etc. etc.... I always like the route that gives you the most flexibility and peace of mind. In some cases that may mean you should buy insurance; in other cases it may mean you should stockpile assets in your portfolio to pay for care. In ALL cases there is never a one-size-fits-all way to look at this; it's a highly personalized consultative process to determine what's best for you.
With enough time and planning, we can build wealth to prepare for this situation. If we don't have time on our side, then we may need to look at insurance.