“I think I’ll just invest the money ever year, instead of spending it on long term care insurance. That way, I’ll have enough money to pay for care myself.”
Often, a client sees the annual cost of a long term care policy, does some math, and says “Why, that’s a lot of money! If I just saved that money, I wouldn’t need the insurance. Ha!”
If only it were that easy, nobody would ever buy insurance. But it simply doesn’t work. Insurance magnifies your money, so you’re literally trading pennies in cost for dollars of protection. Let’s run through a scenario here to demonstrate this.
Bob & Jane are both 60 years old. They’re both in average health, and they’re considering a good, solid long term care insurance safety net policy, one that will provide each of them with up to $180,000 (initially) in long term care protection. This policy, assuming standard health rates, will cost them a combined $3,915 per year – probably less than two weeks in a private nursing home room would cost them today. Bob sees this number and goes immediately on the defensive: “Why, I’m just going to invest that every year, to heck with the insurance!”
So Bob writes a check for that amount every year, and invests it. We all know that he’s going to have up years and down years, but just to be charitable, we’ll assume that he makes 5% every year, year after year, with no down years. By the time they’re both 80, he’ll have roughly $145,000 saved. Not too bad.
Remember, though, this money is supposed to cover both of their care needs. Today, an average private nursing home room in Maine costs roughly $101,000. In 20 years, it’s likely to cost well over $220,000 per year. How far will $145,000 take them if one of them needs facility care? Maybe 6 months? So far the plan doesn’t seem to be working out for them.
What if they had bought the insurance, instead? When they bought the policies 20 years ago, they each had $180,000 available to pay for long term care. This became available the day the policies first went in force. At that point, they’d traded $3,915 in premiums for a total of $360,000 in long term care protection. That’s a much better return, right? From day one they had more long term care protection than they would after saving the premiums for 20 years.
But it gets better. The policy we sold Bob & Jane 20 years ago had built-in “inflation protection” of 3%. So, their benefit pools have grown by a compounded 3% every year. Now, 20 years into their policies, the benefit pools have grown to $325,000 each, for a total of $650,000 in long term care protection that they can draw from.
And wait, there’s more! (I know, this sounds like one of these TV infomercials.) The policies that Bob & Jane bought were also “LTC Partnership” qualified. That means that they provide dollar-for-dollar asset protection if Bob & Jane spend all of their long term care benefits, and then still need to apply for MaineCare (Medicaid.) If Bob steps in front of a snow plow and suffers a horrible head injury, he might lie in a facility for a few years, and spend his entire $325,000 in insurance benefits. Then, Jane applies for MaineCare benefits for Bob. Because he had an LTC Partnership qualified policy, the state will now let her keep an additional $325,000 of their money. This is above and beyond the normal MaineCare allowances. So, when we combine the long term care policy benefits, and the LTC Partnership protection, we’re looking at a potential total of $1,300,000 of long term care protection.
Which looks better now? The $144,700 that Bob might have made investing the premiums, or the $1.3 MILLION of benefits gained from the long term care insurance policy? Do you really need to think about this?
Have a great day! Kerry Peabody, LTC Insurance Specialist, Clark Insurance