We use our investments to fund those things that we can predict: our children’s college education needs, their weddings, and our retirement are examples. But we need to consider insurance for those things we can’t predict: disability, illness, premature death of the wage earner for the family or the back breaking expense associated with a long-term care facility in our golden years.
There is no shortage of horror stories regarding people who take a bad fall in their golden years which results in a broken hip, a concussion, or torn knee ligaments. Dementia and Alzheimer’s are terrible conditions that are challenging to deal with for everyone involved. Preparing for these possibilities has been a difficult task for families and insurance companies alike. Some of the earliest long-term care insurance policies have seen premium increases that are staggering to the point of absurdity. On the other hand, the monthly cost of a long-term care facility can also be devastating financially.
So, what is a good plan to manage this risk?
Risk can be managed internally, outsourced, or shared. The challenge most families have with managing it internally is that the funds needed for self-insurance are often already committed to other purposes (college tuition funding, retirement, etc.). Could someone truly self-insure? Yes. However, the costs are not limited to a reserve account of a fixed amount. This would also require annual contributions to this account to manage the 4% inflation rate often seen from these long-term care facilities. If you are a couple and you want to manage the risk of both of you going into these facilities, you have to double both the reserve account AND the yearly additions.
Shared Risk Management Approach
Given the incredibly high premiums for traditional long-term care insurance, and no ceiling in sight for increases, a shared risk management approach with a more modern policy is probably the best solution. In recent years insurance companies have created hybrid universal life policies that:
- guarantee no premium increases
- provide multiple premiums to cover long-term care expenses
- include a death benefit that transfers tax-free to heirs in the event the benefit was not completely used
- and even has a partial return of premium feature in the event the benefit was never needed.
Though only a portion of this premium can be recovered, in many cases, it can be as high as 80%. The only risk here is the lost opportunity cost of those premiums. Under no circumstances does this hybrid policy cover all long-term care expenses but the shared risk management is generally tolerable and can prevent financial ruin.
The Financial Perspective
To put things into perspective, the national average for an assisted living facility in 2019 was just over $4000 per month. A nursing home semi-private room was just over $7500 per month. A nursing home with a private room was over $8500 per month. Depending on where you live, these costs could be as much as 50% higher than the national average.
It makes a lot of financial sense to purchase some kind of protection and set aside what you can into a premium stabilization reserve account.
Jeff Mount is President of Real Intelligence LLC. Jeff has been active in the financial services business for the last 25 years.
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