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2002-12-03 17:24:00

We have three grown children

Question:  Here is our situation.  My name is Keith.  I am 58.  My wife Joan is 56.  We have three grown children who are now out of college, married and raising their own families.  We are very thankful that we are all in excellent health.  We began seriously working on our retirement plans about 15 years ago.  We both plan to work another 7 years.  By that time we will have paid off our mortgage and should have a guaranteed income of somewhere around $3,500 per month, which will include our monthly IRA withdrawals.  These two IRAs total approximately $60,000 now and hopefully will be close to $100,000 at the time we begin to withdraw income.  Joan and I each have a life insurance policy with a death benefit of $10,000.  We have approximately $40,000 in mutual funds that have averaged a little over 11% return the last seven years, until this past year, which brought the average down to 6% over the same period of time.  Recently we read an article in the local paper entitled 'Long-Term Care… It's not for Everyone'.  The essence of the article was that instead of plowing money into Long-Term Care policy premiums, it would be smarter to invest the money in the stock market or some other interest-bearing fund.  This way… "the money would be available if needed, but would not be lost as it would with insurance."    Why would we not do this instead of buying a Long-Term Care policy?

Answer:  I am aware of the article you are referring to.  Although there were several points I disagreed with, we should examine it nonetheless.  The article was written by Liz Pulliam Weston of the Los Angeles Times.  The format of the article is a question, and then an answer to that question.  There was no lead-in or credits… just a question and then an answer.  The person asking the question is referring to an article he or she read that had stated several points… 1. It makes more sense to invest the money in the stock market or an interest-bearing account instead of paying on a Long-Term Care policy;2. The money would then be available for Long-Term Care when needed instead of "lost" as it would be with insurance;3. Most people die fairly quickly after they become unable to care for themselves, therefore, insurance for Long-Term Care often was not necessary and was money down the drain.The article went onto say… 1. If you can save enough and save it in time, you can self-insure;2. Most financial planners do not recommend buying Long-Term Care insurance if you are rich enough to pay for the care yourself;3. Rich enough is defined as someone with more than $1 million in assets;4. People with few assets should not bother with Long-Term Care insurance because they could probably qualify for government welfare in the form of Medicaid.Let's take a closer look at the points made in the article.  First, you will need to know what the premiums are for the Long-Term Care policy that best suits your needs.  The steps you should consider when deciding on the right policy with the right benefits are detailed in another article in this publication on Page 11.  We know from research from the National Center for Health Statistics and the Department of Health and Human Services that the average age the 'window begins to open' for persons needing Long-Term Care is around the age of 83.  This does not mean care would not be needed earlier, or later… it's just an average.  We also know from the same studies that 7 out of 10 persons past the age of 65 will need some type of Long-Term Care sometime in their lives, 8 out of 10 past 70, and 9 out of 10 past 80.  The studies go on to show the average length of time a man needs Long-Term Care is just under 3 years.  Women average 50% longer.Once you have the monthly premium for the policy that is best for you, figure how much you will pay for this policy  between now and your mid-80’s.  For example, if you are in your mid-50’s now, and the monthly premium for both of you is $185 per month, you will pay approximately 30 years of premiums, or approximately $65,000.     Now the alternative... Instead of purchasing a Long-Term Care policy, let's say you took the same amount of money on a monthly basis and invested it over the same period of time.  Although it would be difficult to find, let’s assume you earn an average of 7% after-taxes on this investment.  At the end of 30 years, the value of your total portfolio would be approximately $225,000.  Again, although this after-tax earnings rate is most optimistic, it would be quite impressive.  In your own example, you have only "averaged 6% over the last seven years" and that is before taxes.  Further, you are making the assumption you will have the discipline required to continue the investment without interruption.  Now… let's connect some dots.  The monthly cost of nursing home and assisted living care today in the Wichita and surrounding area varies from $2,000 to $5,000 per month, depending upon the type of care required (assisted living, simple, supervised, or skilled care).  These rates have increased over the last 30 years at the rate of approximately 3 1/3% per year (Source:  Insider’s Guide to Long-Term Care).  Assuming these rates continue to increase at the same rate, you could expect the cost of care to be anywhere from $6,000 to $15,000 per month per person.  The National Center for Health Statistics study mentioned earlier goes on to say we are all living longer.  This means the average requirements for some type of Long-Term Care will increase in the future.  But let's assume the average requirements stay the same… approximately 3 years for men and 4.5 years for women.  The total cost for the entire confinement of one person would be anywhere from $216,000 to $810,000.  Keep in mind… these figures for care are if just one person requires the average amount of Long-Term Care.  These costs could double if both spouses needed care, or if care was needed for longer than the average.            This illustration should assist in helping you decide whether it makes more sense for you to invest the same money than it does to buy a policy.  What about those couples who are "rich enough"... those the author defined with more than a million dollars in assets.  While they may have the assets it will take to cover the costs of care, I have yet to have anyone explain to me satisfactorily why they would want to spend their assets in this fashion, when it comparatively costs so little to manage the risk.  I am sure most of them worked hard for what they have, invested wisely, and were prudent in their buying habits.  The decision to manage this risk with a Long-Term Care policy falls in line with the rest of the decisions they have made throughout their lives.    Lastly, to those couples with "few assets" who the author told not to bother with Long-Term Care Insurance because they would qualify for government welfare in the form of Medicaid.  Yes, there is a program that insures you will not spend the 'afternoon' of your life on some park bench, but it's not the way most people would prefer.  You have to go through all of your assets and be at the level of poverty before Medicaid is an option.  Even if you are married at the time you need this type of care and go through the Spousal Division of Assets program from the SRS, both spouses have spent much better and more comfortable days throughout their lives than the days they will spend following this process.  The costs for Long-Term Care are usually the biggest monthly obligation most people will ever face.  Maybe what is even worse is never knowing how long you will have to write the checks.  Long-Term Care almost always comes at a time when incomes are fixed… leaving the only 'out' a 'spend down' of income and assets in the absence of a policy.  Many people do not want to believe there is a risk.  These are the ones that say... and believe... "It's not going to happen to me."  Once one understands the risks involved,  and the likelihood that a Long-Term Care confinement could be facing most of us in the future, the subject will at least bear consideration.   If you decide it might make sense to investigate, you need to see if you can qualify for a policy.  Individual policies are underwritten based upon your health.  Finding out whether or not you can qualify for a policy is an integral part of the Long-Term Care decision.  I have had more than one family tell me it makes writing the checks easier if they had the policy in their hands and then chose not to keep it, rather than never to have known if they could have qualified for the coverage… especially when they could apply 100% risk-free. The application process takes less than 15 minutes.  You do not have to take a physical nor do you have to take any kind of special tests.  It's painless and it's quick.There are usually only two things that happen until you see whether or not you can qualify for the coverage…  and neither is in your favor.  You will get older (premiums are based upon age so it will cost more); and you risk becoming less insurable.  Remember... “you can't buy insurance on a house that's burning."Long-Term Care insurance is not for everyone.  Simply stated... you only need it if you have something to protect.  That 'something' may be income, assets, peace of mind, independence, or those of your family.  If you are fortunate to have more than enough, ask yourself these two questions:1. Knowing how I accumulated what I have accumulated, would it bother me to write checks for several thousand dollars each and every month and never know how long I would have to write them?2.  Is it important that I leave anything to anyone when I am gone?If you answer to both of these is 'No'... you do not need Long-Term Care insurance.  If you're not sure, or if you answered 'Yes' to one or both of the questions, and you have determined you have something you want to protect... then a Long-Term Care policy is probably for you.  At the very least... it's something you should consider.