Recently I have been discussing the realities of paying for long-term care needs with several clients, and thought it might be a good idea to share with you some of these discussions. Long-term care expenses are the costs you must personally pay for when you need assistance to independently care for yourself. These activities of daily living or ADLs consist of: Dressing, Bathing, Transferring, Toileting, Eating or Continence. If you have long-term care insurance, generally a person must need help with two of these six ADLs in order to make a policy claim. Care needs may also arise when a person has cognitive problems related to diseases such as Alzheimer’s or Parkinson’s.
So what are the risks of needing this type of assistance?
Well if we put the answer into the context of home or auto ownership the answer is shocking. The odds of our home being seriously damaged by fire are 1 in 96, with the average insurance claim being $170,600. Having your car damaged in an auto accident is 1 in 5 with the average insurance claim being $27,600. BUT the odds of needing help with two of the six activities of daily living are 1 in 2, or a 50% chance! With the average cost of a private nursing home room in the Bay Area being $259 per day or $94,535 per year. The average stay in a nursing home is 2.5 years.
So with the high odds of needing this type of care, and with the expense totaling hundreds of thousands of dollars if necessary, how can a person plan for these expenses in their retirement income plan? As you know, I use a 4-step Retirement Income Planning Process, here is the chart:
Paying for Long-Term Care Expenses: There are 3 ways to pay for care. The first is to self-insure or set aside the funds to pay for the care if necessary. The second is to shift some of the risk to an insurance company through the purchase of insurance. Or the third is to shift the cost of care to society through either the government or a charitable organization.
If you don’t have the thousands of dollars to set-aside to personally pay for care, then there are several insurance options now available. One option is the traditional long-term care insurance policy which will pay if the need arises, but the problem is that if you don’t need the care you don’t get any of your premium payments back. Another option is a long-term care rider tied to life insurance. The attractive feature to this type of policy is that if you don’t need LTC benefits then your heirs will receive the death-benefit from the life insurance. The third type of new policy is an annuity with LTC benefits. This may be a very viable and the least expensive option if you have additional savings to self-insure since this has significant tax saving benefits available. I would be happy to discuss your best options with you if interested.
Here are some additional research articles I have put together if you are interested:
To Your Successful Retirement!
Michael Ginsberg, JD, CFP®