Retirement

It Isn't What You Expect

Two hints: it's not inflation, and it's not taxes. The biggest risk to your nest egg is a long-term care event.

With the average cost of long-term care in an assisted living facility at $3300 per month, a $100,000 nest egg could be wiped out in two-and-a-half years. A private room in a nursing home at an average daily rate of $222 will decimate that $100,000 balance in just 15 months. Still worse, the cost of long-term care has increased nearly 6% annually for the past five years.

Advances in medicine allow us to live longer, but have increased our need for care when we're old and worn out. And if acute diseases like heart failure don't do us in, the chronic ones like Alzheimer's and cancer eventually do. In the process, they'll extend the number of months -- maybe years -- that we'll likely need long-term care.

The four options we have when facing a long-term care event include spending down our assets, relying on family, going on Medicaid (not to be confused with Medicare), and buying long-term care insurance. Long-term care insurance policyholders typically cite "not wanting to be a burden on family" as the main reason for purchase.

The Odds Speak for Themselves

Consumers hate paying for something on which they may never see a return, but consider the following.

  • Odds of your home burning to the ground -- 1 in 16,000
  • Probability of totaling out your car -- 1 in 100
  • Odds of meeting a $2,500 medical insurance deductible annually -- 1 in 25
  • Probability of needing long-term care -- 1 in 2 for a woman; 1 in 3 for a man

We wouldn't go a day without owning home, auto, or health insurance. But statistically speaking, the probabilities of these events occurring pales in comparison to that of needing long-term care.

Want even more reason to ponder long-term care insurance for yourself or a loved one? Consider this: Over half of U.S. states have "filial support" laws that could prod you into forking over cash for your parents' unpaid long-term care debts.

Long-term Care Insurance 101

Health insurance and Medicare help pay for immediate medical expenses, whereas long-term care insurance helps people cope with the cost of chronic illnesses.

Long-term care insurance typically covers out-of-pocket expenses that come with home care, assisted living facilities, and nursing homes. The policies pay for help with everything from the basics, like dressing and bathing, to skilled care.

A long-term care insurance policy creates a pool of money for your future use. How big the pool is depends on the size of the policy; the larger the pool, the bigger the premiums. How fast the pool is drained depends on what type of long-term care is required and how often it's needed.

Long-term care insurance can be purchased either as an individual policy or part of a group plan. Many employers offer group long-term care insurance. Benefits of group plans include inexpensive premiums and no need for medical underwriting.

If you're considering purchasing coverage as an individual, be aware that the underwriting process is getting more conservative, and rejection levels are higher than they were just five years ago. Medical records are reviewed in the underwriting process, and a phone screen including a memory recall test is typically involved. When considering an individual policy, keep in mind that the premiums steadily increase after age 60.

What to Look for When Evaluating Insurers

Long-term care insurance leaves a sour taste in people's mouths because of the exit of several insurance companies from the industry and recent premium increases that have affected some policyholders. But now that insurers have factored in the impact of low interest rates on their ability to generate income to pay claims, the majority of rate increases should be over.

Look for insurers with tenure in the business, exhaustive actuarial data, solid financials, and significant business in your state.

Lastly, keep in mind that long-term care insurance is not a one-size-fits-all solution. There exist cases where it makes a lot of sense and others where it just doesn't. So do yourself and your loved ones a favor and evaluate this for your own situation.


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