May 11, 2012
Why Long-Term Care Insurance is Important
By Larry Swedroe
Long-term care insurance can be a valuable tool for making sure you don’t deplete your assets in retirement.
Even a well-developed investment plan can fail for reasons that have nothing to do with investments. It could fail because the family breadwinner dies prematurely and doesn’t have enough life insurance to cover her loved ones. Or it could fail because of an auto accident that results in a large judgment, and there’s insufficient liability insurance in the form of an umbrella policy.
This is why it’s critical to integrate an investment plan into an overall estate, tax, and risk management (insurance) plan. One area of concern that is all-too-often overlooked in the need for long-term care insurance (LTCI).
According to a survey by Sun Life Financial (SLF), there’s a major disconnect between people’s need for LTCI and the preparation for that need.
First, contrary to what many people believe, Medicare and private health insurance programs don’t pay for the majority of long-term care services that most people eventually need, such as help with personal care such as dressing or using the bathroom independently. Second, when asked to estimate how much costs would increase by 2030, the average estimate put the figure at 56 percent. Based on historical data, by contrast, the costs are estimated to rise 123 percent.
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Long Term Care Insurance and Its Benefits
Although long term care insurance cannot relieve the emotional toll of seeing a loved one in need of long term care, it can relieve the financial toll. Around the clock care in your own home, an assisted living facility or a nursing facility can cost $200-$400 per day, per person or $73,000-$146,000 per year, per person.
If the cost of long term care services continues to rise at 5% per year, costs will double every 14.2 years. Fortunately, the cost of long term care insurance is a fraction of the actual cost for long term care services.
Qualifying for a Long Term Care Insurance Policy
Although most applicants are approved for long term care insurance there are a number of health conditions that can disqualify applicants. Insurance companies ask you to not apply if you have Alzheimer’s disease, dementia or frequent forgetfulness or memory loss. Based on your age, most companies conduct their due diligence by assessing your cognitive skills through a short interview and short memory test. The process is designed to weed out those exhibiting cognitive impairment.
Fortunately for policyholders, and unfortunately for insurance companies, most polices are issued as guaranteed renewable. Guaranteed renewable means you cannot be dropped as long as you pay your premium – even if you are diagnosed with a condition that may takes years to fully develop, such as dementia.
Designing Long Term Care Insurance Policy Benefits
The younger you are the less expensive a well designed long term care insurance policy will be. The three most important components of a policy are:
1. Daily Benefit
Since approximately 80% of care takes place outside of a costly nursing facility, choose a daily benefit that will cover your cost of care in less costly locations like your home or an assisted living facility.
2. Benefit Period
Select a three to five years benefit period, sufficient for most people, and save 40-50% in comparison to an unlimited benefit period.
3. Inflation Protection
Although 3% compound inflation protection will meet most state’s Partnership Program asset protection criteria, long term care costs over the last 20 years have grown at a 5% compound growth rate. Your benefits double every 23.5 years with 3% compound inflation protection. Your benefits double every 14.2 years with 5% compound inflation protection.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.