Buying long term care insurance (or not) is a major decision you should evaluate as you move through your 50’s and 60’s. I’ve hinted about our decision, but I’ve never written a comprehensive post on the topic. Today, I’m addressing it and sharing the numbers that led to our decision. Plot buster: We have decided that we won’t be buying long term care insurance. We’re going to self-insure.Today, I answer the question of Why We ARE NOT Buying LTC Insurance. Click To Tweet
Why now? A few weeks ago, a reader named “Redfish” left the following comment on my Drawdown Strategy article asking about buying long term care insurance. Following that, I had a podcast host who will be interviewing me ask if I’d written a post on why we are not buying long term care insurance. With two “asks” in the past two weeks, I felt it was time.
Ask, and you shall receive!
Here’s the comment from Redfish which led to this post:
Long Term Care – The Risk
One of the biggest financial risks facing a retiree is the potential of spending years in a long term care facility. I’ve seen this risk play out in my personal life, with both my mother-in-law (nursing home) and my dad (assisted living) facing the reality of long term care.
Long Term Care is expensive.
According to this study, the national median cost for various types of care is as follows:
Imagine having to spend $150k per year (2036 prices) for a 3-year stay, and you’re looking at a $500k hit to your retirement nest egg. Ouch.
Long Term Care Insurance – The Problem
For years, buying long term care insurance was seen as the solution for LTC risk. Unfortunately, the normally astute actuaries missed on this one, and they missed big. Insurance companies started seeing their costs for LTC rise dramatically, and have had no choice but to raise their premiums. A lot.
As Forbes points out in Another Big Long-Term Insurance Care Insurance Premium Hike, companies have been raising rates in droves, and up to 90% of insurance companies previously covering LTC have abandoned the business.
Even if you decide to buy long term care insurance, it’s not clear how much you’ll have to pay for it in future years. Rates are not guaranteed for the life of the policy, and it’s likely rates will increase as the insurance companies swallow additional cost increases with the aging of the Baby Boomers. As the article in Forbes points out, if your insurance company raises their rates, you have only a few choices, and all are ugly:
- Swallow hard and pay the premium.
- Reduce your benefits.
- Shop around for another policy.
- Allow the policy to lapse and go bare.
Self Insure – A New Solution?
Given the price increases of LTC insurance, the reduction of competition in the market, and the lack of assurance that rates won’t continue to rise, is there a better solution?
I spent over a month answering that question for myself and will share my analysis with you today.I did a deep dive analysis on LTC insurance, and decided to self-insure. Click To Tweet
The decision to self-insure should not be taken lightly. I did a “deep dive” on my analysis, and I still have concerns. There are clearly risks with the “self-insure” route, but there are also risks with the LTC Insurance route. Neither route is obvious. “The numbers” led me to the decision that was right for me and my family, and I hope sharing my methodology will help as you evaluate your situation.
The Decision To Self Insure
At the age of 51, I decided to tackle the long term care dilemma. Historically folks have advised buying long term care insurance in your 50’s, as your health and relative youth make it easier to secure coverage. With the objective clear, I had several meetings with a trusted insurance professional, studied up on the issues, received a formal quotation from a solid insurance company and (of course) built a detailed spreadsheet to aid in my analysis.
The “Break-Even” Spreadsheet
My spreadsheet basically compared the following:
- Spend the $ on LTC insurance premiums. Or…..
- Invest the $ which would go toward LTC insurance, and let it grow.
Below is a picture of the first two years in my spreadsheet, which I’ll explain below:
The left side of the spreadsheet (Columns A-G) shows the cumulative cost of purchasing insurance (column G). The LTC insurance I was modeling would cost $3,158 in year 1, and increase each year. Alternatively, I could invest the $3,158 and let it grow. This scenario is modeled in columns I – M. As the “self-insurance” balance grew (Column K), I could calculate how many days of coverage I had (Column M) by using a cost of $200/day for coverage, inflated annually at 5%. By comparing the two scenarios, I could determine how many days of “self-insurance” I was building with each passing year.
You’ll note in Column J that I used a conservative growth rate of 4% on the “self-insure” money pool. While conservative, it’s worth noting that I excluded the impact of taxes for the sake of simplicity. I figured I’d likely use after-tax money to fund the LTC insurance, and I’d, therefore, use after-tax money to invest for self-insurance. Any gains in the investments would likely be taxed at the Capital Gains rate, but they’d also likely grow at a rate of greater than 4%. You can nit-pick my methodology, but it worked for me. K.I.S.S.
At What Age Does Self-Insurance “Break Even”?
I continued the methodology outlined above for 40 years. Below are the number of days I calculated that we could cover via “Self-Insurance” money otherwise used to pay for LTC insurance premiums.
According to this analysis by ElderLaw, here are some relevant statistics to consider when evaluating the financial calculations, and making the decision on whether self-insurance makes sense for you:
- Odds are you won’t need care before age 80-85
- If you do need care, there’s a 44% chance you’ll need it for less than a year
- There is only a 1 in 4 chance that your stay will last 3 years or more.
Comparing those two sets of bullet points, I’d conclude that our breakeven point for self-insurance occurs between the age of 80 – 85, which ironically lines up extremely well with the age at which we’re most likely to need the long term care.
Other Considerations In Favor Of Self Insurance
There were other considerations which we considered as we evaluated the pros and cons of self-insuring against Long Term Care Risk. For the sake of brevity, I’ll summarize these in bullet form below:
- If we don’t need LTC, we’d have an additional $1.5M at Age 90 to leave a legacy if we self-insure.
- We’re both healthy and plan to stay that way (Younger Next Year!). Odds are hopefully in our favor.
- We’re not guaranteed that our LTC policy costs would remain as projected in our quotation.
- If costs of LTC increase faster than we estimate, we may have less self-coverage than we think.
- We could be in trouble if both my wife and I need more than 3 years of LTC.
- We need to be careful to not “spend” the extra $$ building up due to not buying LTC insurance.
- We’ve considered setting up a separate account to hold the “Self-Insurance” monies.
- Redfish mentioned potentially buying Life Insurance with an LTC rider – we did not evaluate this option but suspect the inflationary pressures on LTC costs would also affect the feasibility of this “rider” option.
I hope this post has helped shed some light on “Why We Aren’t Buying Long Term Care Insurance”. While you may disagree with our analysis and/or conclusion, I trust that explaining our decision-making methodology will be helpful as you evaluate this topic for yourself. Don’t trust my conclusions for your situation, and don’t ignore taking some time to think through the issue for yourself. It’s an important decision, and one you must make for yourself and your family. As you move through your 50’s and into your 60’s, you’ll face a future reality in which LTC insurance premiums become prohibitively expensive, and you may not be able to qualify for coverage. Take some time now, as you finalize your plans for retirement, to evaluate LTC for yourself. BTW, after I had finished this post and scheduled it for publication, I came across this excellent article on Morningstar, 75 Must-Know Statistics about Long Term Care, one of the best resources I’ve seen on LTC. If you’d like to investigate the topic further, have a look at that link.
What are you doing to cover yourself against Long Term Care risks? Do you agree with our logic on why we’re self-insuring, or are we missing something? Let’s broaden the discussion in the comments below…..