Conversation about... Long-Term Care Insurance

This is part of an email to a client asking about long-term care insurance, who has, in our opinion, sufficient assets to self-insure this risk:

I think we chatted briefly about the long-term care issue one other time so I know you are concerned about it. In short, we feel that you are well positioned to self-insure the risk that you will require long-term care due to your being unable to perform normal functions required for everyday living. Remember that your health care is insured, privately now and under Medicare in the future. What we are talking about is whether to insure the risk of your not being able to get up, dress, feed yourself, etc. The risk that you will require this type of care certainly exists but we feel that you will be able to pay for it without spending down your assets significantly. If you think about the typical claim that is paid by a long-term care insurer, you would get say $125 per day for four years. Do the math and you see that you are paying hefty premiums to potentially receive a total benefit of $125 X 365 days X 4 years = $182,500. Even if you bought a policy with all the bells and whistles that paid twice that much, you are still looking at a total potential benefit of only $365,000. You can easily absorb this expense without spending down your assets.

When you consider that you may never make a claim, the cost to insure the risk is quite high. It is especially hard to justify the premiums when you have plenty of capital today and in the future to pay for the expense of this care if you need it. One other way of looking at it is to consider that we have told you that your assets will support sustained spending of $175,000 annually excluding the home. Add Social Security and you are at about $190,000 of annual cash flow available to you. If you had to move to a long-term care facility, you would likely sell the house and use some of the proceeds to buy into the facility. Your cash flow would not change and all of that $190,000 could be re-directed toward the cost of caring for you and you would still not be spending down your principal. At age 80 or 90, it would not be a problem even if you did hit the principal a little bit. It still will leave a large estate intact for children or charity.

I hope that eases your fears. We are licensed to sell long-term care and will gladly sell you a policy if you insist but we think your estate will be larger in the future if you keep that money invested.