Moore for your Money
BYRON MOORE, CFP®
Question: How do I know if I need long-term care insurance? It’s so expensive.
Answer: What’s so expensive? Long-term care insurance…or long-term care?
I think the first question anyone needs to ask when considering the purchase of any kind of insurance is, “What am I trying to protect myself against?”
What outcome are you trying to avoid?
Some might say they want to have access to the broadest array of services available if they ever need long-term care. For example, people regularly say to me, “I don’t want to go into a nursing home – I want to stay at home as long as possible.”
Others will say, “I don’t want to spend all my money at the end of my life on a nursing home.”
Still others will say, “I don’t want to leave my spouse impoverished because long-term care expenses spent on me ate up all our assets and left her broke.”
And still others will say, “I want my kids to get my money, not some hospital or nursing home.”
All these are valid reasons for obtaining long-term care insurance, but they are not all the same reason. Knowing which kind of long-term care insurance and in what proportions requires a customized evaluation of your circumstances.
Let me see if I can give you a few parameters to get your thinking started. But before the process is over, you’ll need to find an experienced, qualified insurance agent that can guide you through your choices.
- What is your best case scenario? Of course, best case is that you never need long-term care and never spend a dime on long-term care insurance. You live a long happy life and slip comfortably into the night. As an example, let’s say you live to age 90 and die with a $1,000,000 net worth.
- What is your worst case scenario? Worst case is your needing long-term care for a long period of time, not having any insurance, and costing you a significant portion of your wealth. If someone is determined to avoid a nursing home, it is possible to receive long-term care services in one’s home. It’s a shock to most to learn that this is not the least expensive way to receive care, but is actually the most expensive way. It would be a little like trying to staff a nursing home for one person. The biggest cost is personnel. If you have to hire someone to “be there” 24 hours a day, seven days a week, you’re looking at spending around $100,000 per year!
- What is the next best scenario? Again, this would be you never needing a nursing home, but incurring the cost of long-term care insurance all along the way. No doubt the cost of long-term care insurance would reduce your ultimate wealth. But by how much? What if it cost you $100,000, such that your lifetime net worth reduced from $1,000,000 to $900,000? Would you take that deal?
- What is your next worst scenario? Wouldn’t this be your needing long-term care, but then having the long-term care insurance to cover it? You should expect that long-term care insurance would not cover every dime you would spend one long-term care, so there would be some erosion of your estate. Maybe even up to a fourth. Let’s suppose your lifetime outcome is $700,000 in this scenario.
It is important that you work with a professional to calculate your four scenarios – the ones I have written about above are only for illustrative purposes, not as representative of anyone’s situation, certainly not yours.
My point is that most people, once they have estimated these four situations, can make smart choices about their own long-term care.
As one wag has written, if you have not allocated any money to long-term care, you have essentially allocated all your money to long-term care.