In this episode of the Retire Your Way Podcast, I discuss risk management, and particularly whether or not you should buy long-term care insurance to supplement your retirement plan.
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Why Risk Management is Important
First, I want to share a little story about risk management in general. Last week I was at a retreat with my coaches, and one of my fellow advisors told us how last month one of his clients had passed on. He was 43 and had a stroke.
This is obviously always unfortunate, but he also had a wife and 3 kids. A short time after he passed, his wife called their advisor obviously quite emotional and concerned. She asked what she was going to do as her husband was the main breadwinner.
Fortunately, a few years earlier, the advisor had prepared a plan for him. Based on the advisor's advice, he had purchased quite a bit more term life insurance. The advisor was able to tell her to take care of everything else and not to worry about money!
I can’t imagine what she was going through, but can you imagine how much worse it would have been for her if they hadn’t increased their life insurance a few years prior? Risk management or insurance is a real and very important tool.
Jumping Without a Parachute ... Literally!
Now, should you buy long-term care (LTC) insurance? Would you jump from a plane without a parachute?
In 2016, skydiver Luke Aikins jumped out of a plane at 25,000 feet without a parachute. This wasn’t a Mission Impossible movie. This was real life! Here's a link to the YouTube video.
He fell for a few minutes before landing in a net. This daring stunt earned him a spot in the history books as the first complete jump without a parachute.
I know it’s not a perfect analogy because most of the time jumping from a plane without a parachute would result in death almost 100% of the time, and the odds of someone 65 or older needing LTC are about 50/50.
Thankfully, in this case, Luke didn’t die, but I can’t help imagining if he would have ended up about 15-20 feet to his right. Which isn’t that big of an error when jumping from 25,000 feet and aiming for that little net.
Imagine the amount of preparation and planning that went into this effort. The thousands of hours practicing jumping, the prep with his team, the location of the net, the weather, and even the team that jumped with him when he did it.
Obviously, a great deal of planning was involved.
Now I like a good adrenaline pumping experience as much as the next guy, and I’m not opposed to jumping with a parachute if the opportunity arose. But without a chute, no thanks!
Long-term Care Insurance
When we’re doing financial planning, one of the big unknowns is long-term care expenses. According to Genworth’s 2018 Cost of Care Survey, the median annual cost of a private room is now over $100,000 a year, and the median annual cost of aid at your home, is over $50,000.
Most will need services for less than 2 years, but around 14% will need care for more than five years.
Now, here’s the rub: not everyone will suffer from dementia or a long-term illness that requires skilled care; according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health & Human Services, around half of retirees 65 or older may be looking at no long-term care costs in retirement, while the other half may be looking at half a million or more.
That’s quite a difference and why LTC is such a predicament for most people.
Based on the numbers, LTC policies make sense for anyone who’s financial situation would be jeopardized by a two-year stay or ($200,000) in a nursing home or a two-year stay at home or ($100,000). Coverage could be a good idea if:
- You have enough retirement income to cover your living expenses and cover the cost of the policy. (The National Association of Insurance Commissioners says some experts recommend spending no more than 5% of your income on a long-term care policy.)
- You don’t have enough assets to self-insure.
- You want to leave an estate after you slip the surly bonds of earth.
However, if the premiums are going to put you in a tight situation, it might not be worth it.
Medicaid only covers long-term care costs when a retiree has largely exhausted his or her other resources. Once resources are used up, Medicaid steps in to pay for facilities that accept government payments (usually lesser quality facilities).
This is where LTC comes into play. You can cover future long-term care costs with long-term care insurance. The average annual premium for a 55-year-old couple was around $3,000 in 2019, according to the American Association for Long-Term Care Insurance.
Obviously, the older your age when you apply, the higher the premium, but typically, the best time to shop for LTC is when you are in your 50s. These policies generally cover a portion of the costs for a defined period, like three years, five years, seven years and so on.
Supplementing Your Retirement Plan with LTC Insurance
LTC is another way to help mitigate a retirement plan’s uncertainties down the road.
There are also life insurance and annuity contracts that provide long-term care benefits. If you have an existing policy without an LTC rider, you may be able to exchange it for one that does. Reach out to your agent or advisor and start there.
Some people like to roll the dice and avoid paying long-term care premiums. They're thinking the money they’re paying for coverage will be a waste if they never have to use it.
But how is this different from buying home and/or auto insurance that covers catastrophic losses? Fortunately, a high percentage of the money spent on these premiums doesn’t result in an insurance payout.
Insurance is, therefore, a risk management tool.
The real question that people should be asking themselves is: if they can afford it, does it make sense to protect against the biggest unknown expense in a retirement plan’s later years?
Don’t be like Luke and jump without a chute!