If you haven’t already done so, now is an excellent time to consider adding long-term care insurance to your retirement portfolio. Because uninsured long-term care expenses can pose a significant risk to the assets you’ve worked a lifetime to accumulate, long-term care insurance should be considered as part of a complete financial plan.
As former Senator David Durenberger told the United States Senate Special Committee on Aging, “Although the need for health insurance to cover a patient’s medical expenses in case of catastrophic illness is widely recognized, few people are insured against the costs of providing long-term support services for that same person. This lack of insurance coverage jeopardizes the financial security of families and diminishes the economic security of the country.”
The likelihood that you may need long-term care is significant. Some 42 percent of Americans who reach the age of 70 can expect to utilize some type of long-term care during the remainder of their lives, according to a study by the Agency for Health Care Policy and Research. And while long-term care includes a broad range of services, from in-home care to nursing home care, each comes at a cost. Those costs could be substantial, and could have a significant adverse effect on your retirement portfolio.
Why? Most forms of health insurance focus on medical expenses, not the custodial care and non-medical expenses associated with long-term care. Medicare only covers nursing home care after a related three-day inpatient hospital stay, and then it’s only for only 20 days before a $105 daily co-payment is assessed. Medicaid doesn’t kick in until patients have spent down a significant portion of their assets. Therefore, if either you or your spouse needs long-term care, you may have to pay for that care out of your accumulated assets … unless you have long-term care insurance.
Early last year, our company commissioned a study that showed the average cost of a private room in a nursing home met or exceeded $80,000 annually in 10 major metropolitan areas of the U.S. (The nationwide average was $57,700.) If one partner needs such care, the cost could quickly and substantially erode the assets acquired over a lifetime.
Let’s use a hypothetical couple living off the interest of $500,000 of invested assets to illustrate how serious an impact long-term care expenses could have. For the sake of this discussion, assume the couple’s investments are earning approximately 8 percent annually, generating about $40,000 per year in income. Let’s also presume this couple needs all of this income to support them while they’re living together in their home.
Based on an $80,000 annual cost for nursing home care, it may appear that this couple has enough for a little more than six years of care. However, that basic calculation does not consider the living expenses of the spouse who remains in the community. If this couple is using all of their investment income to provide for their living expenses, they will soon need to start withdrawing from the principal for a portion of those living expenses, as well as for the long-term care expenses of the partner who needs care. In circumstances like these, it’s easy to see how the assets accumulated over a lifetime could soon be completely exhausted.
Long-term care insurance can help provide the funds to pay for the care you may need, while simultaneously protecting the assets you’ve worked a lifetime to accumulate. Long-term care insurance may also help preserve financial independence, choice and dignity, and those can be priceless.