In the last eight years of her life, Paul’s mother lived in five different long-term care facilities. She began at an assisted-living community, but after a hospitalization, she was moved to a rehab facility. A year later, she was moved to a long-term care facility. The facility would not hold her room during her next hospitalization, so upon release, she was moved to a new nursing home. After six months, Paul moved her again because he was unhappy with the quality of care. Paul’s mother required a third hospitalization and passed away soon thereafter.
Paul’s inheritance dwindled to the equivalent of two weeks’ pay. If Paul’s mother purchased long-term care insurance, she could have left an inheritance that could pay for her grandchildren’s college education in today’s dollars — around $638,400 — enough for Paul’s three children and his sister’s four children!
Surprisingly, when it was recommended he purchase long-term care insurance during a review, Paul looked at the expense and asked, “What would my rates be if I waited five years?”
The reality is, that information is irrelevant. Insurance underwriters know everyone will die. They don’t know who will get sick and for how long. They have statistics showing 70 percent of those 65 and older will experience a long-term care event. As Paul gets older, his risk of needing care increases and he could become uninsurable because of health reasons. Even if Paul remains healthy, by 59 he risks not being able to afford the increased policy premium. Carriers typically raise premiums by about 4 percent for each year purchasing coverage is delayed, simply because of age. Furthermore, carriers are raising premiums on new policies between 4 and 8 percent to cover the losses on their existing policies.
Before you balk at the cost, you need to quantify your risk. Most financial and retirement plans are built to support a lifestyle, not the potential for long-term care. In our story, Paul’s mother was a widow. If her husband was still living, he would need to draw upon their retirement assets for his own living expenses in addition to paying for her care. According to Genworth’s 2014 Cost of Care Survey, the median cost for an assisted-living facility in metro Atlanta is $2,775 a month, while the median daily rate for nursing home care is $205.
The cost of long-term care is significant, with the potential to drain your resources for retirement and the legacy you want to leave. Your financial plan accounts for a certain level of spending, and you want to tailor your long-term care policy to both your budget and your quantified risks. An insurance adviser can guide you through the nearly 20 different decision points that affect the pricing and benefits of a long-term care policy. While it’s easy to focus on 401(k)s and IRAs, long-term care planning is a critical component of retirement planning — one that deserves as much careful review as your investments.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The Marietta Daily Journal will periodically publish columns from KSU business faculty.