Certified Finanicial Planner, McAdam LLC
People often anticipate new stages in their life such as the first day of college, starting a new job, the day your children are born, moving into your dream home, or achieving retirement. Sometimes new stages in life arrive unannounced such as the day you meet a lifelong friend, watch a child’s first steps, or imagine a new career. Similarly, new needs for long-term health care are often unannounced and a day may come when you can no longer physically perform certain daily tasks, like making yourself a sandwich, not being able to bathe yourself, or even getting out of bed without help. While most people would rather not think about these moments, it is something you must consider; for your sake and the sake of your loved ones.
When it comes down to it, you really have three options for long-term health care expenses. You can ignore the risk, you can self-insure and absorb the cost yourself, or you can transfer the risk to someone else, like an insurance company. Let’s explore all three.
1.Ignore the risk - “It won’t happen to me!”Obviously this is what we all would like to think, however; according to a study performed by Genworth in 2015 an estimated 70% of Americans over the age of 65 will require some type of long-term health care1. Whether it is due to a physical ailment like breaking a bone or a serious illness, or a mental incapacity such as Alzheimer’s disease. Seven out of ten people will have a financial burden on their retirement nest egg. In addition to being a financial burden, not planning for your care can cause stress amongst family members. So if your plan is to hope you are one of the three who will not require care, the odds just are not in your favor.
2.Self-insure - For a percentage of Americans this is a good option, unfortunately the percentage is small. The American Association for Long Term Care estimates the cost of care to be $195-225 per day with an average need of 892 days2. Totaling approximately around $200,000 per person who needs care. That is also in today’s dollars, with the cost of care outpacing consumer price index (CPI) in just about every state. The majority of people do not have hundreds of thousands of dollars of surplus in their retirement plan. The other question is even if you have the surplus, is that where you want your assets to go if its avoidable?
3.Transfer the risk - Insurance is never a popular discussion, most people don’t love to buy insurance. The fact of the matter is, in most cases, it is necessary. Roughly ten years ago the only type of long-term care insurance out there was “pure”insurance or a “use it or lose it” policy. If you didn’t need the coverage, you paid into a policy for which you never received a benefit. The rates would also increase every year because as you got older, the risk was higher of you needing to use the policy. That doesn’t sound like a great deal to me. There has been innovation in the long-term care insurance industry where you can now set aside a portion of your assets to protect for long term care costs if you need it. If you do not need the coverage, then you can use the money for yourself or you can pass it on to your loved ones when you pass away (in a tax efficient manner). This is only one example of many ways to protect yourself against the risk of long-term care costs.
The best advice we can give you is to educate yourself on the options that are available to you and to make an informed decision. Just like everything else in financial planning, it depends on your situation, your plan, and your goals. Like most things in life, procrastination or willful ignorance will seldom yield the results you will like! Taking the time to consider your own long-term health care situation and goals can ensure that unannounced doesn’t have to mean unprepared.
1 Genworth (2015). Cost of Care Survey. Retrieved September 2015 from; https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_040115_gnw.pdf
2 The American Association for Long Term Care; http://www.aaltci.org/
Rebecca Tinger and Justin Caudle, financial advisors with McAdam, provide comprehensive financial planning to business executives, attorneys, and successful families in the DC metropolitan area. They strive to simplify clients’ financial lives, provide access to planning and investment strategies, and help clients achieve financial confidence.