Long-Term Care Insurance and What is the Real Cost of Self-Insuring?

Financial professionals realize that Medicare doesn’t cover long-term care and that it’s a bad idea to gift assets to qualify for Medicaid or MediCal (in California). The Deficit Reduction Act of 2005 tightened loopholes that allowed people to transfer assets to their children so they can qualify for Medicaid benefits.

Self- insuring for high net worth individuals needs to be addressed. Long-Term care specialists need to provide the proper information so that the clients can make an educated decision about long-term care insurance. It is important to calculate the real cost of self-insuring and communicate it to the client.

It is dangerous to ignore the inflation factor when planning for Long-term care. Let’s look at a married couple in their mid 50’s with $2 million of liquid assets not including their primary residence. At first glance, the couple considers what their liability would be at today’s rate. The average daily rate for a nursing home in California is $210/day. So, now the couple does some quick arithmetic and arrives at an annual cost of $76,660 with a potential 5-year cost of $383,250.00.

They quickly conclude that they can easily afford to self-insure when they compare the 5-year cost of $383,250 to their $2 million liquid net worth. The problem with this is that the couple didn’t come close to the true cost of self-insuring. To do that they would have to do the following:
· Adjust today’s cost of care for inflation
· Consider the potential tax consequences of taking a qualified plan distribution or selling as asset that has appreciated in value to pay the cost of care-out-of-pocket.
· Account for lost investment opportunity on the money that was spent self-insuring during the five years they pay for care.

Now, let’s look at the real cost of care with the couple living another 30 years. This would be the approximate time one of them may need long-term care. Today’s expense of $210 per day could grow to more than $900 per day 30 years from today. Multiplied out over a five-year care event, this would result in an out-of-pocket expense of $1.66 million, which is substantially more than the clients were anticipating.

In addition, if high net worth individuals have a combined state and federal marginal tax bracket of just over 37%, the could incur an additional tax liability of $610,000 if they take large enough distributions from their qualified retirement plans to cover the cost of care. The cumulative distributions could exceed $2.27 million to cover this care event. If the long-term care event was for only one spouse and the second spouse lived on another five years after the first spouse’s death, the second spouse has lost the use of the $2.27 million which was spent caring for the first spouse.

So what is the cost to insure this risk? What is the cost of purchasing a long-term care insurance policy as a hedge against the risk of needing long-term care? If the couple is in good health, they may be able to purchase a State Partnership long-term care insurance policy with a $210 daily benefit, a five-year benefit period and 5% compound inflation protection for a standard rate annual premium of approximately $2200/year per person. The couple would pay a total of $132,000 over 30 years to insure themselves against the $2.27 million in long-term care costs.

To be totally honest and fair, you can even take into account the lost investment opportunity on the premium. Assuming an after-tax rate of return of 4%, they would lose an additional $124,000 of investment return, bringing the true lifetime cost of purchasing long-term care insurance policies to $256,000 when paying for 30 years.

In conclusion, when most high net worth individuals understand the true cost of their choices, they see that long-term care insurance is an extremely cost-effective hedging strategy. It is important for the individual to understand the financial impact a long-term care event brings to brings to their retirement. That is when you see the real value of long-term care insurance.

For more information, consult with a Long-Term Care Specialist who has been trained in Long-Term care Financing and Planning. Visit http://www.LongTermCareInsurancePros.com and request a Free, No Obligation Consultation with Dane Petchul, LTCP, CLTC