“My financial professional told me that I don’t need long-term care insurance (LTCI) because I can self-fund.”
We hear this all the time, and it always has us wondering whether the financial professional is a portfolio manager, a CPA, an estate-planning attorney, or a comprehensive financial advisor. Wondering if the financial professional is aware of the risk, cost, tax advantages, or asset and income protection associated with long-term care insurance. Wondering if your advisor knows your financial goals.
A Real Life Example
I recently had a conversation with a friend who just received a rate increase on her employer’s group LTCI premium. Widowed and wealthy by most standards, her financial goal is to leave a significant inheritance to her kids and grandkids. Retired at age 56. Now age 69. Travels constantly. Just back from Antarctica and has visited all seven continents.
Her call to me was about life insurance so she could be sure she could leave enough money for her kid to inherit without tax liabilities. I’m not an expert in the life insurance arena and suggested she talk with her financial advisor. He told her she could self-fund and didn’t need life or long-term care insurance. Hmmm, this sounds familiar.
How Much Will You Need?
She was just diagnosed with a significant health issue, and is still contemplating whether she should pay the increased rate on her long-term care insurance policy. She asked me how much money she needed to self-fund. Talk about a loaded question!
Without asking her how much money she has in liquid assets, I told her that, according to the market defined by the Wall Street Journal, she will need $500,000 to $5,000,000.
A lot depends on the cost of care where you live. Costs vary widely across the country and even within states. This exercise will help you decide if insurance or self-funding is prudent for you:
- Check the cost of care venues where you reside and/or where you plan to reside in retirement: Cost of Care Report.
- Project costs when you are 80. Most claims are filed between the ages of 80 and 85.
- Project costs using a 4% or 5% increase in the cost of care. Costs are increasing annually based on supply and demand. We have a shortage of caregivers (supply). And the leading edge of baby boomers is turning 80 this year (demand).
- Multiply the annual cost by four years. Sixty percent of LTCI claims last longer than one year, and the average duration of those claims is 4.3 years. About 20% of these claims last longer than five years and tend to be tied to dementia, which is the number one cause for claims today.
- Figure out how much of the projected cost you could or would want to self-fund. That will help you determine if LTCI is important to your financial security.
Where It Stands Now
In the end, she said she decided to pay the increased premium rather than self-fund.
To illustrate why “just self-fund” is often bad advice, we created this Case Study about Diane that you may find insightful.
Also, you may find our blog Why Self-Fund If You Can Insure interesting.
