Your Long Term Care Dilemma
In the first five months of 2015, we’ve already had (3) Relaxing Retirement members who have required long term care services, i.e. assisted living or nursing home, and another who will enter an alzheimer’s specialty facility later this year.
I can’t begin to tell you how incredibly sad it is to watch individuals, whom I’ve known and had an intimate relationship with for years, reach this point in their lives.
As I’m sure you can imagine, the toll that each situation has taken on their families is overwhelming.
There is, of course, the emotional and physical toll. And, then there is the financial toll.
These events have prompted me call your attention to the potential financial risk you too are facing, and your options for dealing with that risk.
I strongly recommend taking a few minutes to read this.
What’s Your Risk?
If you objectively take a step back for a moment, one of the conclusions you’d arrive at is that the downside “financial” risk of you passing away decreases over time, thus decreasing your need for life insurance.
However, on the flip side, the “financial” risk of caring for your health increases dramatically with age.
I recently had the opportunity to read a very long study on human longevity and the incredible advances we’ve made since the beginning of the 20th century.
Here are a few facts to ponder for a moment:
- The joint life expectancy of couples reaching the age of 62 (who are BOTH non-smokers) is 92! That means that the likelihood of one spouse reaching age 92 is very good.
- Of those turning age 65, 69% of them will require some form of long term health care
- 52% of those at age 65 will require care for at least one year
- 20% of those at age 65 will require care for five years or more
- The average length of stay for those who enter a nursing home is 5 years
Now, if we remove the emotional aspect of the care for a moment and strictly evaluate the financial risk that you face, it becomes a pretty daunting thought.
“Managing” Your Risk
What we’re after here is assessing and then “managing” the risk. And, whenever you’re confronted with a risk, there are three questions that you must ask yourself:
- “What’s my potential financial loss?” (Assuming you don’t have insurance already to protect yourself) So, you have to actually put a number on it.
- “What’s the probability that I’ll suffer this loss?”
- “Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?”
Let’s start with #1: what’s the potential loss? The cost to receive care in your home or to move into a nursing home in many areas in and around the Boston area now exceeds $12,000 per month.
Given that the average length of stay is 2.5 years, that’s a total “potential” risk of well over $350,000 for each spouse.
Now, before we move on to anything else, let’s stop and think about that potential risk you face.
Let’s assume for a moment that your Retirement Resource Forecasters™ look fine given your need to withdraw $5,000 per month from your Retirement Bucket™.
However, if you get sick, and it costs $12,000 per month for care, you now need to withdraw $17,000 per month from your Retirement Bucket™.
$5,000 for income and $12,000 for health care.
If you continue at that pace for long, your Retirement Bucket™ likely won’t be able to handle it and you’ll run out of money.
This is financially devastating for your healthy spouse who still needs the money to live.
The key is to know just how financially devastating for you personally. In other words, what does your scenario look like if you need care for three years?
For five years?
For seven years?
You need to define what your personal risk exposure is so that you can make an educated decision for yourself.
Please notice that all of this has to be worked out before you even think about how to ‘manage’ the risk.
How Will You Deal With This Dilemma?
At the risk of throwing cold water on the situation, let’s be blunt.
There are two ways to approach this problem. The first is to take on 100% of this risk yourself.
In other words, if you need care, you’d assume 100% financial responsibility and deal with the extenuating consequences.
In my opinion, as long as you do this after a complete assessment of the risk, and the costs of passing some or all of that risk on to some other entity, I believe that’s fine.
After all, the chances are in your favor that you won’t need the care.
However, if your family’s health history is not great, or if you’ve personally witnessed hundreds of thousands of dollars walk out the door to pay for the care of a family member, you may have second thoughts about assuming 100% of this risk.
If that’s the case, you have two alternatives:
- pay for it yourself, or
- have the government pay for it through Medicaid
Qualifying For Medicaid Assistance
To be very clear about this, in order to have the government pay for your care through Medicaid, you have to qualify.
And, that involves relinquishing all control over all of your assets and giving them away to your family.
Or, you have to place your assets into an irrevocable trust (a decision you can’t change after you make it)
If your assets have been out of your ownership and control for five years, you may be able to qualify for help from Medicaid (which is government assistance for the poor).
In order to qualify for Medicaid (government assistance), you have to have virtually no assets in your name for five full years.
Your Other Option
On the flip side, if you don’t like that alternative and thus choose to pay for your long term health care yourself, you can purchase money at a discount to offset the potential costs, and that’s what long term care insurance is all about.
Although I’m a believer in using insurance as a last resort after you’ve exhausted all of your other options, I’ve yet to find anything that does what long term care insurance does.
Long term care insurance is nothing but a tool to help you “manage” this huge financial risk.
- It can be used to protect your spouse’s lifestyle in case you get sick and need care,
- It can protect your assets that you’ve worked so hard to build up over your lifetime for your kids. And, finally
- It can provide you with options for your care. This is very important! If you rely on the government’s Medicaid program to pay for your care, then you’re at their mercy to determine what care you will receive and where you will receive it.
So, if you’ve reached this point, and you believe you’d like to push some of this substantial financial risk on to another entity like an insurance company, now you can begin to intelligently talk about long term care insurance.
Can you see how absolutely critical it is to go through the thought process we’ve walked through?
If you don’t do that first, and become crystal clear on your own unique situation, you will be at the mercy of any commissioned insurance agent who comes knocking at your door.
And, that’s no position to be in.
You want to be in complete control so that you can custom tailor a plan that covers what’s most important to you personally.