Barron’s magazine has a good article this weekend regarding long-term care insurance. As we’ve discussed before, an estimated 70% of people turning 65 will need long-term care insurance. This could be basic help with daily tasks, or it could be full-service nursing care. Most of that 70% will rely on unpaid family members, or Medicaid, if they qualify. Medicare does not cover most long-term care needs. For decades, basic long-term care insurance was sold, but the insurance companies dramatically underpriced it, relative to the cost inflation that actually occurred with healthcare. This has created a dynamic where insurance companies such as Genworth, go to the states to request price increases. These price increases can be absolutely brutal, often increasing annual premiums by more than 100%. The other options are to receive a reduced amount of insurance protection, or give up your insurance, so many people try to keep paying the higher premiums if possible.
With over two decades in the industry, we’ve seen many families adversely impacted by long-term care issues. For instance, a husband battling dementia in a nursing facility that is costing several thousand dollars a month. These costs are eating up the social security income that the family had been relying on for its monthly spending. The result is that the family must draw down aggressively on what investments they do have, but that money goes quickly. The last option is to either downsize the home, or even to a reverse mortgage.
Another example occurs when loving children quit their jobs to assist their parents in need of care. This of course is extremely honorable, but often it occurs at the peak of the children’s career and earnings. This might pressure the children’s family’s own financial situation and retirement goals. These are big issues, which is why it is important to think about how you want to handle long-term care costs.
Some wealthier families can elect to self-insure. This would entail being able to pull from your investments without having it dramatically impact your life. Others might plan on downsizing or selling their homes to finance long-term care. These options can be tricky for a variety of reasons, as you don’t know what the markets will be like when you have those long-term care needs.
While traditional long-term care insurance policies are still sold, the industry has evolved a bit towards asset-based plans. These plans might bundle life insurance with long-term care riders, which pay out when long-term care needs arise. Whole life insurance is not meant to contend with investments, but instead is a savings and wealth transfer vehicle. The benefit of this type of plan is that if you don’t use your long-term care insurance, the estate gets the premiums paid back upon your passing. This might be a good way to catch two birds with one stone, as life insurance is a hugely important thing to have. Another benefit of whole life is that there are living benefits, as the cash value can be tapped into. The insured borrows money from the insurance company and pays an interest rate, while the cash value continues to compound. This can be a nice source of cash to draw from during market downturns, when you might not want to sell your investments, or if you want to use a lower cost of capital to fund an attractive investment per se, which allows you to leverage your policy. This is definitely not a blanket recommendation, but it can provide tremendous security.
Term insurance can be a great option as well, but of course it mostly covers the unexpected passing of a family member, as by the time the person reaches 60-65, the term insurance often becomes too expensive to continue. What you absolutely want to avoid is being uninsured as tragedies do happen, and we want to make sure our loved ones are protected. There are combinations of term and whole life that can also be very effective ways to protect your wealth. My radio partner Bruce Weinstein and I do a lot of work together combining the benefits of insurance and our dynamic investment strategies, so if you have an interest in discussing if these strategies are right for you, please give us a call today!