When Should You Get Long Term Care Insurance?

Posted December 20th, 2012 in Insurance by Jeremy Waller

I’ve already talked about why you need LTC insurance. Even if you have a modest amount saved for retirement, you could quickly go bankrupt if you end up in a nursing facility. If you look at the statistics for end of life care, it’s startling.

The average private nursing home room will set you back $74k per year. With most people staying 2 to 3 years, you’ll be out of pocket $200k or more.

Fortunately, there is an insurance product designed to offset this risk. Long term care insurance is just like health insurance except that it pays for extended stays in non-emergency medical facilities. For the same reason that you should carry a catastrophic health policy, you should carry long term care insurance.

When to Buy Long Term Care Insurance

The timing of a LTC policy is tricky though. Buy it too early in life and you’ll be paying premiums needlessly for years. Wait too long and premiums will be astronomical at best or you health may preclude you from getting insurance at all at worse.

Most financial experts say you should start considering policies in your mid 50s and should definitely have a policy in place by your 60th birthday.

Before age 60, you have less than a 1% chance of ending up in a nursing home. After this point, you have two things working against you. Premiums rise exponentially as you move past 60. If you wait too long, it probably won’t even make financial sense to get insurance. The other problem is that the chances of contracting serious illness increase significantly as you age, preventing you from even qualifying for LTC insurance.

Evaluating Cost vs. Benefit

The cost of the insurance policy varies greatly depending on when you purchased it. In you mid-fifties, you’ll probably get quotes around the $150 range. Once you hit 60, premiums will run $200 to $250 per month.

Rounding up, let’s say you’re paying $3,000 per year in premiums. Scenario A – you pay yourself $3,000 per year and invest it. Scenario B – you pay $3,000 per year for LTC insurance.

In each scenario we’ll assume you buy coverage at age 60. You then live to the age of 78.2, the average life expectancy in the US. We’ll also assume that you spend the last 2 years of your life in a nursing facility.

Scenario A – Invest It

Just doing a back of the envelope calculation, $3,000 invested annually at 8% for 16 years nets you $119k. That’s enough to say in an average nursing home for 1.5 years, nearly a year less than the average stay. In order for this to work, you would need to live longer than average, stay in a cheaper facility or have your overall stay be less than 1.5 years.

Scenario B – LTC Insurance

This option is pretty straightforward. You pay $3,000 per month and don’t have to worry about needing enough money to cover the cost of a stay in the nursing home.

There are a couple of things to consider here. You come out ahead in scenario A if you live longer than average. You also come out ahead never need nursing care or only need it for a short period of time. At your death, the remaining funds can be passed on to your heirs.

The only problem here is that you are playing the odds. Yes, there’s a chance that you could leave more to your heirs, but there’s also a chance that you could spend the last few years of your life penniless.

Quality of life is a big factor for me personally. I would prefer taking the chance that I would never use the LTC insurance and have the piece of mind that any nursing care I would need is covered.

Have you considered long term care insurance as part of your retirement planning?


No LTC Insurance? The Cost Could Be Astronomical

Posted October 7th, 2012 in Insurance by Jeremy Waller

In my last post I talked about the importance of having long term care insurance. Chances are, you’ll need some sort of assistance as you get older. If you don’t have family that is willing and able to help, the cost of care can quickly eat through your retirement savings.

Depending on the type of care you need, your our of pocket costs could be anywhere from nothing to well over $100,000 per year. You may be fortunate in that you never need any significant kind of assistance. But, it’s also quite possible that you will need the care provided by a full time nursing facility.

The costs associated with the different kinds of care providers vary depending on the level of assistance you need.

Best and Worst Case Scenarios

Obviously the best case is that you never need any kind of assistance. But it’s not very prudent to assume that this will be the case though.

Adult Day Care

The next best case is if you have family who is able to help. Even in this case it’s likely that someone isn’t going to be available to help 24/7. That’s where an adult day care comes in. An adult day care can provide the assistance needed when family isn’t available.

An adult day care can run anywhere from $40 to $100 per day. If this is needed on a regular basis, the cost can add up quickly.

Home Health Care

The next option is home health care. This allows you to continue to live in your own home while getting the assistance you need. These caregivers are very flexible and can be available to help full time or just a few hours a week A full-time home health aide will cost around $45,000 per year on average.

Assisted Living

If more assistance is needed, you may end up in an assisted living facility. These facilities are designed to provide assistance with day-to-day tasks, but typically do not provide any significant level of medical care.

On average the cost is on par with a home health aide, but your standard of living will likely be lower. A large unit at a nice facility can be 2 or 3 times more expensive.

Nursing Home

The last option is a full-time nursing facility. These facilities are equipped to those who are bed bound, require more physical assistance than an assisted living facility can provide or have a severe mental illness such as Alzheimers or Dementia.

These facilities are typically charged at a daily rate which works out to $77,000+ per year on average.

The Default Option Isn’t Very Good

If you chose to do nothing you may end up in a bad place – both relationally and physically. There are countless stories of children who have no choice but to care for their parents when they are no longer able to do so one their own.

Many people are ridden with guilt at the thought of putting their parents in a nursing home. The decision is made even more difficult if the parent does not have the financial means to pay for it.

You may think that you can just rely on medicaid to pay for your care. That option is riddled with problems though.

First to qualify for medicaid you have to essentially be at the poverty level. That means you’ll have to sell practically everything you own and those assets will have to be used to pay for care. Only once those resources are exhausted will medicaid pay for care.

Medicaid will also only pay for care in certain facilities – which may be lower than the standard that you would prefer.

The bottom line is, it is imperative that you plan for care as you age. You can plan to pay out of pocket, but you need to ensure that you adequately plan for the worst case scenario. Consider the cost of a nursing home in your area – adjust for inflation – and make sure that your plan for retirement is sufficient to cover that amount.

How Much Life Insurance Should You Have?

Posted August 3rd, 2012 in Insurance by Jeremy Waller

What would happen to your family’s finances if your died today? Would they be able to pay the bills without your income? If you have someone who is depending in your income to eat, then you need life insurance.

Life insurance is designed to protect your family in the event of an early death. We’re all going to die; the question is when.

Since the purpose of life insurance is to provide for your family after you are gone, you need enough insurance to replace your lost income.

Let me also mention this, there are many different types of life insurance out there. The purpose of life insurance is to pool the risk of an early death. It shouldn’t be used as an investment vehicle (*cough* whole life insurance *cough*). To prove for your family after your death, all you need is a term policy.

The general rule of thumb is to have 10 times your annual income. Many people know this rule and many people use it as a guideline, but most don’t really think about why.

The why is very important. If you don’t understand why, then you can’t make an informed decision. Based on your situation, is 10 times your income enough? It is too much?

The amount of insurance you need depends on the number of years that your income is needed after you are gone.

Let’s Run the Math

If you were to die during the term of your policy, the death benefit would be paid in a lump sum. Now your beneficiaries could just put that money in a bank account, pay their expenses as they normally would out of that account and in approximately 10 years the money would be gone. It could be done that way, but it’s a terrible plan.

Anytime you receive a large lump sum of money and don’t have an immediate need for it, it should be invested. Ideally, an investment ladder would be set up where the funds needed in the next few months would be held in an easily accessible account (likely with a lower rate of return) and funds needed years down the road would be put in a long term investment vehicle (with a higher rate of return).

With a 4% rate of return, the proceeds would last 12.8 years.

With a 6% rate of return, the proceeds would last 15.3 years.

With a 8% rate of return, the proceeds would last 20.3 years.

Now these are conservative estimates. I’ve based this on monthly withdraws equaling your pre-tax income. In reality, your beneficiaries should only need to withdraw your post-tax income – what your take-home pay is.

However, I’ve also excluded inflation to simplify the calculation. In the end, these two factors may cancel out. These numbers are meant to be more of a general guideline.

How Much Life Insurance Should You Have?

Is 10 times your annual income enough? At a minimum, your beneficiaries should be able to achieve a 4% rate of return on the proceeds. Will your children still be at home after 13 years? After they are able to support themselves, can your spouse support their self? If you are a stay-at-home parent, can your spouse afford child-care and other help as needed?

If you are unsure, I would always be on the safe side. Term life insurance is cheap.

Regardless, if you don’t have life insurance now and you have people depending in your income to survive, you need life insurance. Don’t waste time because you’re indecisive. You can always make changes to your policies later.

Is Health Insurance Worth It?

Posted February 3rd, 2012 in Insurance by Jeremy Waller

Is Health Insurance Worth It?

Health insurance is one of the most important types of insurance you can have. Heath care costs in the U.S. are ridiculous! Even a simple inpatient procedure can cost you in excess of $10,000. If you don’t have insurance one trip to the hospital could put you under serious financial strain at best and could bankrupt you at worst. Continue Reading »

Are Annuities A Good Investment?

Posted October 31st, 2011 in Insurance, Investing by Jeremy Waller

Last week I hit on a financial vehicle that tends to get a bad rap – annuities. Dun dun dun dun….

I’ve seen a lot of popular financial advisers and finance bloggers preach the evils of this vehicle. For some people, that advise is solid. But for others, annuities might actually be useful. So are annuities a good investment? Continue Reading »

What Is An Annuity And How Does It Work?

Posted October 26th, 2011 in Insurance, Investing by Jeremy Waller
Annuity Cartoon

Comic courtesy of Lance Andrew

I listen to a number of podcasts from several different finance gurus. Over the past week I’ve heard people asking questions about annuties. The story usually goes something like this…

Caller: My financial advisor told me I should roll my IRA into an annuity. Is this a good idea?

Guru: No! It’s a terrible idea!

End of call. Continue Reading »