Long-term care can be extremely expensive, whether care is provided in a nursing home, assisted living or memory care facility, or at home with full-time caregivers. A prolonged need for care can quickly consume hundreds of thousands of dollars and significantly damage a smaller retirement portfolio. However, long-term care insurance only makes sense for a relatively narrow group of people. Those with very few assets may ultimately rely on Medicaid after spending down their savings, while those with several million dollars can often afford to self-insure.
Long-term care insurance is most useful for married couples with enough assets to protect but not enough to comfortably cover years of expensive care. The primary concern is preventing one spouse’s long-term care needs from consuming the retirement assets on which the other spouse needs to live. Policies generally require the insured person to meet specific qualifications before benefits begin, and that can also create administrative challenges at a time when the person needing care may have diminished physical or mental capacity. Coverage can come through a traditional long-term care policy or, in some cases, through riders attached to annuities or permanent life insurance policies.
People typically consider buying long-term care insurance around ages 55 to 65, often as they approach financial independence and begin dropping disability insurance. Premiums depend on factors such as age, health, and the insurer’s claims experience, and premiums may increase over time. There is also no guarantee that the benefits received will exceed the premiums paid, since long-term care may never be needed or may only be needed briefly. For those who do buy coverage, the goal should be to insure enough of the cost of the type of care they would actually want. For most white coat investors, however, the preferred strategy is to save and invest enough throughout their careers to eventually self-insure against long-term care expenses.
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Dr. Jim Dahle:
Long-term care insurance is a topic that often comes up in the White Coat Investor community. The idea behind long-term care insurance is to pay for a financial catastrophe known as requiring long-term care for years. Long-term care can be really expensive. Whether it’s being put in a nursing home or some sort of assisted living, memory care, or the most expensive type, which is being able to stay in your home and having multiple people take care of you, especially if you need somebody 24/7, 365 in your home, it can be very expensive.
A nursing home varies in cost by where you are in the country, but the last time I priced it out in my area, it was close to six figures per year. And so that can be a lot of money, especially if you’re in the nursing home for a long time. $100,000 a year times five years is $500,000. That’s going to devastate a portfolio of $700,000, for instance.
But what you need to keep in mind is there are a lot of white coat investors who can self-insure long-term care because $500,000 just isn’t that much money to them. If you’ve got $5 million and one spouse has to end up in the nursing home, and they’re in there for five years spending $100,000 a year, well, that’s probably okay because you have $4.5 million other dollars out there that are continuing to earn money and to grow in value as time goes on.
And besides, that spouse in the nursing home is now not spending money on other stuff. They’re not going on flights to Europe while they’re in the nursing home. They’re not buying boats, and maybe you can get rid of a car. There are other expenses that tend to go away.
So whether you need long-term care insurance or not depends on where you are in life. Most people are not in the range of income and assets where long-term care insurance makes sense. For example, if you’re retiring with $20,000, you can’t afford long-term care insurance, number one. And number two, you probably don’t need it because if you go in a nursing home long-term, you’re going to spend down that $20,000 relatively rapidly, and then you’re going to go on to Medicaid, which is going to pay for your long-term care.
On the other hand, if you have $3 million or $4 million or $5 million, you can afford to self-insure this cost, and so you also don’t need to buy long-term care. So it’s really only some sort of a group in between, and where the exact numbers on that are varies with the person. But perhaps generously would be somebody retiring with a portfolio between half a million dollars and maybe $2 million that is married.
Because keep in mind, if you’re not married, you can just spend down your assets and then go on Medicaid. Very few people that spend all their assets on long-term care are ever going to live outside of a long-term care kind of situation. It’d be unusual for you to need eight years of long-term care and then go back to living independently. So you can spend all of your assets on long-term care and still be okay.
But what you’re trying to do is not impoverish a spouse that doesn’t need that long-term care. You’re going to blow it all while you’re going through your long-term care situation and really hose your spouse. So that’s who long-term care is really for: a married couple that doesn’t have enough retirement assets to fund long-term care out of their pockets.
There are qualifications, like any insurance policy, that you have to actually be requiring the long-term care before that policy is going to start paying benefits. If you don’t need long-term care and the insurance company can show you don’t need it, then it’s not going to pay.
And so this also brings in another great reason to self-insure it if you can. You don’t have to fight with the insurance company, right? Trying to provide the documentation that you actually need long-term care, especially since this often happens toward the end of life when people’s capacity, both physical and mental, is reduced. Is that really the time you want to be fighting with an insurance company anyway? You’re almost surely going to need help from your children or a friend or some sort of an advocate for you to get the insurance company to pay for the care anyway.
Now, you can buy all kinds of different types of long-term care coverage. The most straightforward product is a simple long-term care policy that pays for nothing but long-term care. But there are other types of ways to get that coverage. Sometimes it’s a rider on an annuity or even a permanent cash value life insurance policy. The ins and outs of this go beyond the level of detail we’re looking for in this particular video about long-term care insurance. But be aware that those are options as well if you find yourself in that asset range where it actually makes sense to buy something to help pay for long-term care.
The factors that go into what the premiums are are generally your age and your health, as well as the claims experience that the company has had. As a general rule, people tend to buy this about the time they’re dropping their disability insurance. So as you become financially independent and get toward the end of your career is when long-term care insurance is typically bought. You know, 55, 60, 65 years old. Those sorts of ages tend to be the ages when people are shopping for long-term care insurance if it’s something they should need.
So the downsides of long-term care insurance are that it’s a relatively new insurance product, and so a lot of companies that offered it actually went out of business as soon as their clients started needing them to make payments because they didn’t price it appropriately. Other downsides, besides the company going out of business, are that the premiums can increase.
And of course, it’s insurance. So there’s a good chance you’re just not going to need very much long-term care. You paid thousands and thousands of dollars in premiums over the years, and then you died a month after you needed long-term care. You’re not going to get your money’s worth out of that policy. It just isn’t going to be the sort of thing that is going to pencil out for you. It’s insurance. You’re trying to protect against a risk that might or might not show up.
But if you do decide to buy long-term care insurance, I would suggest you at least buy enough to pay for the cost of the long-term care you would like to have. Now, that might be a memory care facility in your area or a long-term care facility in your area, or it might be the cost of actually having people come into your home to care for you. But frankly, if you can buy enough long-term care insurance to pay for that sort of an expense, you probably have enough assets to be self-insuring long-term care risks in your life.
So when comparing long-term care insurance policies, go to an insurance brokerage or an insurance broker that focuses on selling these things. Recognize which of the policy features matter the most to you, which ones may not be worth paying anything extra for, and then compare them and buy the one that you think is most appropriate for your situation.
But for most white coat investors, I encourage you to save and invest enough money that you just grow your assets beyond the amount needed to self-insure for long-term care.
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The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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