Tag Archives: Face

The Risks of Self-Insuring for Long-Term Care

The Risks of Self-Insuring for Long-Term Care

Statistics show that one in every five people who reach the age of 65 will eventually require some form of long-term care (LTC). This means a great deal of us will face the exorbitant LTC costs at some point in our life.

On top of that, Americans are living increasingly longer lives. Recent estimates give a healthy 65-year-old man a 24% chance of living to at least 90 and a healthy woman a 35% chance of living that long. Obviously, this is great news. However, the longer we live, the more likely we are to suffer from a LTC event.

Unfortunately, Medicare does not cover LTC expenses. This is why it’s critical for each and every family to plan ahead for their LTC needs. Without the proper protection, such an event could devastate a family’s finances.

Can you afford to self-insure?

If you have a high net worth, you may assume that you’d be able to cover LTC costs on your own when necessary. However, financial experts point out that LTC planning is crucial for everyone—even for affluent families. That’s because the costs of self-insuring for long-term care may be much more expensive than you realize.

Consider this: the national average daily rate for a nursing home is currently $209 a day.* Therefore, a one-year stay would cost $76,285, which adds up to $381,425 for a 5-year stay.

Let’s say a couple named Bob and Jan are in their mid-50’s. Bob and Jan have $2 million in liquid assets, not including their primary residence. Therefore, they assume they’d have more than enough funds to cover a 5-year-stay in a nursing home.

However, Bob and Jan aren’t factoring in these additional costs of self-insuring for long-term care:

  • Inflation: The ever-increasing rate of inflation could quickly magnify the cost of long-term care. What costs $200 today could cost as much as $1,000 30 years from now.
  • Taxes: If you are forced to sell an asset that has appreciated in value or take a qualified plan distribution to cover the cost of long-term care, you will probably face some hefty tax consequences.
  • Lost investment opportunities: If you end up paying out of pocket for long-term care for five years, you are losing out on other investment opportunities. If you were not self-insuring for long-term care, you could be investing that money elsewhere.

Considering these factors, let’s look at the real cost of long-term care for Bob and Jan. Let’s say that Bob will require long-term care in 30 years, when he’s in his 80’s—an age when many individuals require long-term care. In 30 years, today’s daily nursing home cost of $209 could balloon to more than $900 a day due to inflation. Therefore, if Bob required long-term care for five years, he and Jan would pay $1.66 million out of pocket. Obviously, this is a significantly higher amount than the $381,425 they initially calculated.

On top of that, let’s say Bob and Jan must take distributions from their qualified retirement plans to cover the cost of long-term care. As high net worth individuals, Bob and Jan have a combined state and federal marginal tax bracket of just over 37%. That means they could face an additional tax liability of $610,000 if they take large enough distributions from their retirement plans.

Consequently, the total cost of Bob’s long-term care event could exceed $2.27 million. That means if Jan lives another five years after Bob dies, she may have no funds remaining to pay for every day expenses—much less for her own long-term care event.

LTCI is for everyone

As you can see from Bob and Jan’s scenario, even high net worth families need to consider purchasing long-term care insurance (LTCI). Because LTCI helps cover the exorbitant costs of long-term care, it can protect your family’s finances if you were to face a long-term care event.

If you want to discuss your long-term care insurance options, meet with a Brian Gruss. Brian can evaluate your unique situation and help you customize an effective plan.

* Source: Genworth Financial 2008 Cost of Care Survey April 2008. The cost of care in a metropolitan area may differ from the state average rate.

Non-Qualified Expense Penalty

Non-qualified expense penalty: Under the new law, if you use your HSA funds for non-qualified expenses, you will face a higher penalty. The tax penalty for non-qualified HSA distributions will increase, effective January 1, 2011, from 10% to 20%.