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Should I Buy Long-Term Care Insurance or Self-Insure? - YMYW podcast - YouTube
Channel: Your Money, Your Wealth
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Tom from Colorado is on.
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Tom: Hi my name's Tom.
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My wife and I are both in our early 60s.
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I've been reviewing long-term health care
policies and they don't really seem to offer
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a lot of coverage.
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And I wondered what the analysis is, what
kind of financial analysis, in terms of whether
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I should purchase long-term care insurance
or just self-insure that and invest the money
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to have it there for if and when it's needed.
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We have enough assets to self-insure but I'm
not sure that's the wisest thing to do and
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I'm trying to evaluate this risk.
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Thank you so much.
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I appreciate you taking my call.
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All right Tom, thanks so much for giving us a buzz.
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Andi, I think we need to send Tom a book called...
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Think, Act. and Invest Like Warren Buffett
by Larry Swedroe.
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All right, making a note.
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Yes.
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Tom gets a book.
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All you gotta do folks is just leave us a
message and you get free gifts.
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All right Alan, what do you think?
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Because Tom is sitting in the same boat that you're in.
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Yeah that's that's true.
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I'm in my early 60s and that's a decision
that you've got to look at.
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So here are a few things I might say, and
that is the long-term care insurance, relative
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let's say 10 years ago, is a lot more expensive.
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And the benefits have reduced significantly.
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And the benefits have reduced.
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So the actual act, getting those policies,
it used to be clearer.
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Now it's not as clear to me that there's a
huge benefit.
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I would say this, honestly, if you can self-insure,
there's nothing wrong with that.
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It's just a matter of it's an insurance - if
you want to have the insurance company handle
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some of that risk, like any insurance policy,
if you end up needing it you'll be very happy
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you have it.
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If you don't need it you'll be thinking, "why
did I do this?"
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But here's the analysis, Tom, just take a
look at what the premium is.
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So you're in your early 60s, you're probably
not going to need this benefit for, what,
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25 years.
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Okay?
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Alan's going to need a benefit probably a
lot sooner than that.
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(laughs)
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(laughs) that's probably true.
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So let's say that you buy a policy for $10,000
a year, hypothetically, for $300,000 in benefit.
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I have no idea.
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I don't know what he's looking at.
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I don't know what his elimination period is,
I don't know if he's getting it with his spouse,
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to get a spousal discount - there are all
sorts of iterations on how you can buy a standalone
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long-term care insurance policy.
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And let's just explain what that is first.
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A long-term care policy works as - if you
have one of your activities of daily living,
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I guess two out of the four.
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I think there are four, I'm not an insurance
agent but I think there are four.
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I think there are four too.
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If two of those go bad, you can't bathe yourself
or clothe yourself, can't get out of bed,
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can't transfer, can't move... right?
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And continence?
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Eating, bathing, dressing, toileting, transferring,
and maintaining continence.
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OK well聽 I guess there's a little bit more
than four.
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Six of them.
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Six.
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So if two of those go bad, then the long-term
care insurance would trigger.
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If you have it.
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So now you need help - you need someone to
help do one of those activities of daily living.
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And so you can go into a home and have full
time care, and that full-time care聽 - in
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Colorado, I don't know, I'm guessing it's
going to cost you 60 to $80,000 a year depending
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on where you go.
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You could probably go to a really nice place
and it's going to cost you a couple hundred
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thousand dollars a year, or you could go somewhere
that's not so nice and it probably cost you
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$50-60,000 a year.
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So on average, the average person's long-term
care stay is roughly four years.
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So if it's going to cost you $50,000 a year
for four years, you know you can do the math
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somewhat easy.
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That's going to be $200,000.
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So you could say this: all right well $200,000
is what that need is in today's dollars.
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So that is also going to increase with the
cost of inflation of probably close to,
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what, 7-8%.
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So that $200,000 is going to be roughly $400,000.
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You following my math here folks?
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Just barely.
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I got it.
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I'm with you.
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All right.
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Thank you.
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So what Tom needs to do is say, well what's the need?
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In future dollars it's going to cost me X.
$400,000 of money that needs to come from
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somewhere to pay for the care.
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So he can insure it by buying a long-term
care policy and saying, I want to cover that
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need by either 100%, 50%, 30% whatever he
wants to do.
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So maybe it's a little bit of self-insure
like Al suggested, maybe you fully insure,
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or maybe you do somewhere in the middle.
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So you do somewhere in the middle and you
say, "I want to cover half of the cost."
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So you need $200,000 of benefit, hypothetically.
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Then you look at what's the premium going
to cost me to get this $200,000 of benefit?
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And if that cost is $5,000 a year, $10,000
a year, whatever it is, you take that premium
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dollar that is going to go to the long-term
care policy and then you say, let's say I
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invest that premium versus buying the policy.
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What rate of return do you need to generate
on that premium dollar to get you to the same
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pool of money that you would have as the long-term
care policy would pay out?
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Does that all jive?
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(laughs) Let me make it simpler.
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That was simple!
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I know but I'm going to go back to my answer,
which is when you do all this math, what you're
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going to find is that by the time you add
up all your premiums and put in a rate of
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return, that sum total is going to be less
than your benefit.
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So in other words, if you need it, you're
going to be glad that you have it.
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If you don't need it, it's wasted money.
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That's what you're going to find after you
do all this.
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And you're absolutely right.
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That is the way to do the calculation.
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Yeah.
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Because I think that's what he was asking.
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He's like, "financially speaking, how do I
calculate this, how do I calculate the risk?"
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Well, the likelihood of you going into a long-term
care facility, Tom, is probably pretty high.
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I mean, it's higher than other types of risks.
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And high means, I don't know, maybe 50%?
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Yeah some like that.
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It doesn't mean it's going to be four years,
it might be a few days.
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It could, yeah.
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You break a hip, right?
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Or you could be like Christopher Reeve and
be in there for 20 years.
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Who knows.
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Or maybe you die of a massive heart attack
or you die peacefully in your sleep.
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Yeah.
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And you don't need it.
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Yes.
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But the fact of the matter is that long-term
care premiums, or that the benefit, is tax-free.
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So you got to do a breakeven analysis, but
you're absolutely right, Al.
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It's just like I have home insurance and I
pray that my house doesn't burn down. (laughs)
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Actually it's even more than that - longtermcare.acl.gov
says someone turning age 65 today has almost
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a 70% chance of needing some type of long-term
care services.
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Yeah but that also could be an in-home service
person that comes in once a week and washes
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your sheets so it doesn't...
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(laughs) My god I just had the sickest thought
in my... oh my god.
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(laughs)
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Of course you would.
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(laughs)
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Oh boy.
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Washing Big Al's sheets, I mean that would
- I would want to get paid a hundred grand
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a washing on that.
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See, and this is why you don't want to inflict
that upon your spouse.
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Oh my goodness gracious.
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