Long-term care insurance can be a complicated area to understand. There are multiples types of insurance products that approach long-term care needs differently and the purpose of this article isn’t to get into that. What I want to demonstrate is a way to look at statistics to determine if you are likely to need coverage or not.
Many insurance company’s like to use statistics from Morningstar that state that 58% of women will need long-term care in their lifetime. That’s a fine statistic, but how does it break out overall and between the age brackets? When we look at that, we see that according to 2018 data, 8% of people between the ages of 65 and 74 and 17% of people between the ages of 75 and 84 will need long-term care services. Where the numbers jump is that 42% of people older than age 85 will need long-term care services.
According to Genworth and the National Care Planning Council, the average long-term care cost per year is $102,200 in 2019 for a private room, and the average length of time is 835 days. If we estimate these numbers together we can assume total cost average to be around $300,000.
Because the greatest chance of needing long-term care services is typically over 85, we can then estimate that you would be reasonably able to cover the average future costs of long-term care services for the average length of stay if your portfolio could take a $300,000 reduction at age 85. What is the best way to factor in inflation and future cash flow planning to determine overall probability of success? A financial plan! If you don’t have a financial plan to help give you guidance, you should consider sitting down with a financial planner to run some projections.
If you really want a back of the napkin way to try to calculate this, here’s the mechanics:
1) Assume an average inflation rate and take a $300,000 cost and inflate it up to future values when you will be age 85.
2) Then run projections for your portfolio, what’s in there as far as investments, any future additions, and come up with the approximate value at 85 after you factor in social security, any other income, and subtract out withdrawals, required minimum distributions and such.
3) Subtract out the future long-term care cost estimate from the portfolio and then see what kind of withdrawal rate your portfolio supports and determine if that would be enough to live on.
That process is much smoother on software, however, so I recommend talking to someone, and don’t worry – the initial consultation is complementary with no obligation for prospective clients for my practice.
Looking at long-term care coverage in this way might give you another perspective to determine if getting an insurance policy is necessary. Of course, everyone’s lives and circumstances are different, so you’ll have to factor family longevity, illnesses, and the like. You may find that what you were considering is not necessary or could be approached in a different way.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. This case study is for illustrative purposes only. Individual cases will vary. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Guarantees are based on the claims paying ability of the issuing company. Long Term Care Insurance or Asset Based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59 ½, may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.