How Much Long Term Care Insurance Should You Have?
One of the biggest questions in long term care insurance is “How much coverage should we have?” I have researched and thought about long term care coverage and amounts quite a bit in the past year.
Let’s quickly review the risks.
The first risk is that you or a spouse will require long term care but cannot afford it. In that case, Medicare won’t help much but Medicaid might. But if you need Medicaid benefits for long term care, most of your other financial assets will be used up first. That’s the law.
That brings us to the second risk: Can you and your spouse survive in retirement (i.e., meet your basic living expenses) if a long term care event exhausts all or most of your retirement nest egg? In other words, if you self-insure or rely on Medicaid to pay for long term care, what will happen to your or your spouse afterward? Will you become part of the retired but poor class? Will you become dependent on your children?
A third risk if you are uninsured (or under-insured) is that your options for long term care will be limited. With insurance, you may have more options for in-home care and/or in-patient care at a facility that is better than a basic-needs nursing home. If you are completely dependent on Medicaid, the bureaucrats will be deciding what you can and cannot afford. You may not be happy with the result.
Perhaps at this point you are thinking that you and your spouse are too healthy to worry about needing long term care. If so, I recommend you read my earlier post on why we bought long term care insurance.
Here is a list of the criteria we considered in deciding how much long term care insurance we should have:
1. The Costs of Long Term Care. Long term care is more expensive than you might think. It can also vary dramatically depending on where you live. For more information, read my earlier post on predicting the costs of long term care. More cost information is available at this government long term care site.
2. Ability to Self-Insure. Many retirement planning experts believe that there are two groups of people for whom deciding whether to purchase long term care insurance is easy: The very wealthy and those with few or no retirement assets. The very wealthy can afford to pay for their own care. Those with little or nothing have nothing to lose before Medicaid steps in. Those in the middle (like us) have to strike a balance.
Let’s assume that a long term care event lasts for three years. Three years in a nursing home can easily cost $225,000. Can you afford to pay that from your own assets, then live on what remains?
If the long term care event is less severe, perhaps requiring a home health aide three days each week for three years, that can cost $18,000/year for three years = $54,000. That is a much easier financial hit to absorb using personal resources.
3. Income Security. A related factor is the stability of your retirement income if a long term care event depletes your retirement nest egg and/or takes away the ability to work. If you are able to survive on Social Security and/or pension benefits, the need to buy a large amount of long term care insurance is decreased.
4. Cash Flow and Affordability. Unfortunately, for many people the number one factor in deciding whether and how much long term care insurance to buy is the cost. Some of this thinking is short-sighted. If you own a home, you definitely must insure it against loss due to fire. Your mortgage lender will insist on it. Did you know that you are more likely to need long term care than experience a destructive house fire? This suggests that you should make room in your budget for some level of long term care protection. One option for basic coverage is the new public long term care plan that will be available.
5. Availability of Alternative Care Resources. Perhaps you have a lot of family members nearby. Perhaps some of them like you enough to help with your care if you need it. Do you really want to depend on that? Do you really want to burden family members with ling term care – something that you can insure against?
We decided to purchase enough long term care insurance to cover a five year event, with a $150/day benefit. Thus, the lifetime benefit is approximately $275,000. This benefit is inflation-adjusted. If one of us has a significant long-term care need, this probably won’t cover all of the costs but it will be enough that our personal assets can handle the rest. (For more on our policy: Long Term Care Insurance – Key Policy Provisions.)
A decision on whether to purchase long term care insurance and how much coverage to buy should not be procrastinated away. You may decide not buy any coverage but at least it should be an informed decision.
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