When it comes to any type of insurance, you should consider how much of the risk you can afford to pay on your own and how much you want to pass off to the insurance company. The more you’re willing to pay out-of-pocket, the lower the insurance premiums. Pretty simple concept—except in the case of long-term care.
The problem with planning for long-term care is that you don’t know how incapacitated you’re going to be and how long you’ll need the care. Every case is different. Therefore, you should do an analysis of your financial and personal situation that includes the cost of long-term care in your state, your life expectancy, and what tradeoffs you are willing to make.
Let’s assume that you and your spouse have $20,000 coming in from Social Security and $30,000 from a pension. This combined income of $50,000 covers all of your expenses. You also have savings and investments totaling $300,000 that has averaged a 7% return over the past five years.
The average annual cost of a nursing home stay is $50,000. If either you or your spouse needed this care, where would the money come from? Whoever is still at home could cut back on his or her expenses. But that rarely helps, since the one in the nursing home may need additional medications and incidentals not covered by health insurance.
You could withdraw $21,000 (7%) from your investments and not touch the principal. But you would still be $34,000 short. If you take out the full $50,000 needed, your portfolio would be gone in less than seven years.
In the above example, one way to make up the $34,000 shortage would be to purchase a long-term care policy that pays $95.00 per day. Another would be to buy a less expensive policy with a lower daily benefit. This means taking on a greater portion of the costs yourself and using some of portfolio’s principal. Either alternative could work. But it comes down to your comfort level to assume more of the risks.
For help in designing a long-term care plan that matches your desires for reducing risk, return the enclosed coupon.