Your Long Term Care Insurance Conversation: Part II
Last week, we identified what everyone must think through way before ever discussing long term care insurance with an agent.
Now, let’s move on to the second critical thought process that must take place before you enter the long term care conversation.
Let’s begin by recapping what we know so far about our case study involving John and Mary:
- We know that John and Mary are each retired and they need $10,000 per month to support their lifestyle
- They receive $5,000 per month from social security and pensions, so their level of Retirement Bucket™ Dependence is $5,000 per month or $60,000 per year.
- Their Retirement Bucket™ has $2 million dollars of investments in it. (a nice round number to work with)
- And, most importantly, we’ve determined that this amount is enough to provide them the income they need for the rest of their lives (including cost of living adjustments to compensate for inflation) without having to earn a crazy rate of return in order to make it happen.
Now, that’s terrific news assuming everything goes according to plan.
However, as we all know, rarely does everything go according to plan, so we have to closely examine the risks.
And, one of those “risks” is your health.
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.
Once you’ve reached age 65, statistics illustrate that there’s a 30% chance that either you or your spouse will need to receive long term care in one of five ways:
- In your Home,
- In an Assisted Living Facility,
- In a Nursing Home,
- In an Adult Day Care Facility, or
- In Hospice
A 30% chance!!! That’s a pretty big number.
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
So, 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 (as we alluded to a few weeks back):
- “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 $10,000 per month.
Given that the average length of stay is 2.9 years, that’s a total “potential” risk of well over $300,000 for each spouse.
Now, before we move on to anything else, let’s stop and think about that potential risk for John and Mary from our case study.
Remember that their Retirement Resource Forecasters™ looked fine given their need to withdraw $5,000 per month from their Retirement Bucket™.
However, if either John or Mary gets sick, hopefully not both, and it costs $10,000 per month for care, they now need to withdraw $15,000 per month from their Retirement Bucket™.
$5,000 for income and $10,000 for health care.
Clearly, if they continue at that pace for long, their Retirement Bucket™ won’t be able to handle it for very long and they’ll run out of money.
This is financially devastating for the 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 their scenario look like if one of them needs 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 Do John and Mary 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 themselves.
In other words, if John or Mary need care, they’d assume 100% financial responsibility and deal with the extenuating consequences.
In my opinion, as long as they 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 their favor that they won’t need the care.
However, if their family’s health history is not great, or if they’ve personally witnessed hundreds of thousands of dollars walk out the door to pay for the care of a family member, they may have second thoughts about assuming 100% of this risk.
If that’s the case, John and Mary have two alternatives:
- pay for it themselves, 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 their care though Medicaid, John and Mary have to qualify.
And, that involves relinquishing all control over all of their assets and giving them away to their family.
Or, they have to place their assets into an irrevocable trust (a decision they can’t change after they make it)
If their assets have been out of their ownership and control for five years, they 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 John and Mary don’t like that alternative and thus choose to pay for their long term health care themselves, they 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 in your toolbox 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 these last two weeks?
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.