“Would you like to protect your purchase, sir?”
I bought a new phone earlier this year. Satisfied with my purchase price, I went through the check-out process. “I highly recommend you add our purchase protection, sir,” said the representative.
It’s an easy answer for me… “No, thank you.”
We’ve all experienced this, whether it’s a new phone, a flight, or a car purchase.
For me, the answer to most of these offers is easy because of two reasons… 1.) The company is profiting off this “purchase protection”, otherwise it wouldn’t be offered in the first place, and 2.) If my phone broke or I couldn’t make my flight, it is not a catastrophic loss. I am comfortable taking these risks.
However, some risks need to be more carefully considered than my phone purchase.
Long-Term Care
It’s not a secret that health care expenses in retirement can be enormous. Because of this, there is an entire industry that focuses on protecting this risk called Long-Term Care (LTC) Insurance.
The LTC insurance industry has gotten a bad rap in recent years. Policies sold many years ago often came with an assumption that the premium payments would be fixed for the insured’s life.
It turns out that many of these premiums have had significant, unexpected premium increases due to a larger-than-expected number of claims, increased life expectancy, and rising health costs (source: https://www.aaltci.org/long-term-care-insurance-rate-increases/).
Despite the frustration amongst current policyholders, LTC insurance is a popular topic, especially for individuals between the ages of 50 to 75. It’s well known that extensive medical care in your latter years can deplete a portfolio, so it’s worthy of discussion.
What is Long-Term Care?
Long-Term Care describes the services for health or personal care that are needed when one can no longer perform these activities on one’s own. This can include In-Home Care,
Home Modifications, Adult Day Care, Assisted Living, and/or a Nursing Home. Source: https://www.nia.nih.gov/health/long-term-care/what-long-term-care
The Numbers (all provided via Morningstar as of 2023) – https://www.morningstar.com/personal-finance/100-must-know-statistics-about-long-term-care-2023-edition
· 70% of people turning 65 will develop a severe LTC need in their lifetimes, and 24% of people turning 65 will require paid LTC for more than two years.
· 3.7 years is the average duration of LTC need for women who require LTC care, while it’s 2.2 years for men.
· 49.1% of nursing home residents have a diagnosis of Alzheimer’s disease or another form of dementia.
· $158,775 is the median annual nursing home cost for a private room in the New York area (2021).
The Need
As seen above, the need for LTC insurance is abundant; however, it can be expensive, and recent premium increases have caused many to shy away from the conversation.
Many new policies include both life insurance and a long-term care benefit. These are often purchased with the intention of using the insurance for LTC expenses; however, if LTC is not needed, the death benefit pays out to the policyholder’s beneficiaries.
This counters the frustration that people felt while paying decades of premiums, only to realize that the premiums were now too high to afford.
Insurance Companies are Profitable…
Insurance, by definition, is a transfer of risk. This is true for phone insurance, airline flight insurance, life insurance, and LTC insurance.
For almost all insurance, the majority of people pay consistent premiums along the way, and the insurance company then pays out occasional large claims. The only way the insurance company stays in business is if they collect more in premiums than they pay out in claims.
It’s a simple reminder that insurance companies tend to win in the long run.
Despite this, remember that insurance is a transfer of risk. In this case, you are transferring the risk of a potentially very expensive health care need in your latter years.
Two Questions to Ask
To explore whether a LTC insurance policy may be worth it, keep it simple. Ask yourself two questions…
1.) Am I self-insured?
2.) Have I experienced a family member or friend entering a LTC facility? Did they have insurance? What was their experience?
Question #1
The good news? This question can be answered “yes” or “no”. However, getting to a “yes” or “no” answer takes detailed, sophisticated planning.
In our world this means developing a full financial plan and cash flow analysis, which eventually leads to running a “what-if” scenario showing an expensive, multi-year health event (potentially also including factors like increased inflation, lower portfolio returns, etc).
If the portfolio can withstand a significant medical shock, then you are self-insured. If adding LTC expenses depletes your assets, then you are not self-insured.
Although most of our clients are self-insured, many prefer to avoid a significant drop in their balance sheet towards the end of their life.
Question #2
While the first question is binary, the second question is more subjective.
As humans, it’s well documented that we often make decisions with the emotional part of our brain. The elephant often overruns the rider (h/t psychologist Jonathan Haidt).
Even if someone answers question #1 as “yes”, many of us have experienced a loved one enter a LTC facility. For one, a family member may have entered an expensive facility which ended up wiping out their savings, significantly affecting the amount of inheritance they wanted to leave their children.
For another, a friend may have entered a facility and their LTC policy covered all their needs – a big win.
For someone who is self-insured and has not had a personal experience that makes them nervous about future LTC expenses, LTC insurance is very likely not needed. However, most others should have a conversation and run an analysis. Ultimately, the benefits (risk mitigation, liquidity, psychological) must outweigh the cost (premiums paid).
Another note: It’s rarely necessary to cover the entirety of LTC costs. Attempting to cover 50% (as an example) can provide proper risk mitigation while also reducing the premiums paid.
Asset Allocation
While not often talked about, whether you purchase LTC insurance can and should affect the design of your portfolio (your “asset allocation”).
Imagine an 80-year-old couple with $3m in assets. LTC expenses for this couple could surpass $1m if they both went into a nursing home for an extended period. When designing an investment portfolio for this hypothetical couple, it’s typically recommended to keep a certain portion of funds in assets that are both liquid and that do not fluctuate like the stock market. “Boring Bonds” would fit this profile (think government bonds and high-quality corporate bonds). We consider this a safety net to tap into if cash is needed for medical expenses.
Having a portion of your portfolio in high-quality bonds will reduce the growth potential of your assets. However, someone with a LTC insurance policy may be able to position the rest of their portfolio with more of a growth orientation (knowing that the LTC insurance policy provides liquidity when it’s most needed).
Instead of allocating to stocks and bonds, you might think of it as allocating various portions of your portfolio to… 1.) Growth, 2.) Stability, 3.) Risk mitigation.
The LTC Decision
Many of our clients do not need LTC insurance. The costs (premiums paid) outweigh the potential benefits for some folks.
However, most investors should at least have a conversation. This will allow you to examine the decision both from a quantitative and qualitative standpoint, the head and the heart.
Long-term Care insurance is a tool that will be incredibly useful for some, and unnecessary for others. If you’d like to determine which bucket you fit into, reach out to your Private Wealth Advisor. We’d love to provide the confidence needed to make an informed decision.
Blaine Carver
Private Wealth Advisor
Trevor Cummings
PWA Group Director, Partner
