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Unintended Outcomes: Long-term Care

by Craig Moser on March 3, 2017

As a Certified Financial Planner, I work to build plans that reflect my clients’ futures as accurately as possible.  Inevitably, planning comes down to a question of dealing with unintended outcomes.  For example, “How will the possibility of a long-term care event affect your finances?”

The best study I’ve found regarding long-term care, was by Peter Kemper, Harriett L. Komisar, and Lisa Alecxih in 2005.  Their study provided forward looking estimates for the long-term care needs for individuals turning 65 in 2005.  They estimated 58% of men and 79% of women aged 65 and older would need long-term care at some point.  The average lengths for care were 2.2 years for men and 3.7 years for women.  When you multiply this by the average cost of care, it’s easy to see just how expensive unintended outcomes can be.

This question typically evokes one of two responses:  “I will find a way to pay it out of my pocket”, or “I will shift that risk to an insurance company”.

Long-term Care

In the case of buying Long-term Care (LTC) insurance, some people feel they will never use it.  Buying something you don’t use is a cost without any return on investment.  In these days of tight margins, LTC insurance is often seen as a cost item.

But if you don’t have LTC insurance, a decline in health will increase your financial obligations.  To fulfill the obligation, some people draw from the accumulated wealth amassed over a lifetime.  Without proper planning, sufficient funds to cover both long term care and day-to-day costs of living might not be possible.  In this scenario, you run the risk of running out of money sometime in the future.

Fundamental Decisions

As we work to address this scenario, you need to make some fundamental decisions about long term care.  The primary questions being:

  • How do I fund potential costs of long-term care?
  • How do those costs affect my surviving spouse?

In most situations, one spouse remains healthy while the other may require assistance.  The result is your nest egg is spent on long term care rather than allowing your surviving spouse maintain his/her lifestyle in later years.

Options

  1. Buy the straight-out coverage and if you need care, it should pay.  Know your deductible periods and caps on what is paid.  This information should be plainly stated in the policy, so be sure to read and understand what you are buying.
  2. You could look at either an annuity or a life insurance policy.
    • There are a few annuity companies that have accelerated benefits riders or riders that activate an increased benefit if you are unable to perform as little as 2 of the 6 normal activities of daily living.
    • In the case of a life insurance policy you will pay for the rider, but someone will reap the benefits due to the very nature of the contract. You will either use the LTC benefit, pass away sending the tax-free death benefit to your named beneficiary, or you can quit the policy and take any remaining cash value out of the policy.

As you are designing a life insurance strategy, be cognizant that you may want more than a basic term insurance policy in place as you get into your 40’s or 50’s.  In this case you may want to consider owning the permanent type of insurance to be available for your later years, and one that can give you more than just a death benefit.

Planning ahead and deciding earlier rather than later can save you thousands of future dollars.  To avoid unintended outcomes, evaluate your options as early as possible and plan to cover the needs of the older person you will become.

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