Many people have learned the hard way that Medicare will not pay
their long-term care expenses.
There are 42 companies in Oregon that provide Long Term Care Insurance,
We represent many of them.
Medicare is designed to pay only for short-term, acute illness.
Medicare pays only 2% of all skilled nursing care expenses in
the United states today, and nothing for custodial or intermediate
care - the type of care that most people require!
1 out of every 2 people age 65 and over will require long term
care (US News and World Report, January 31, 1995) 7 out of 10
couples reaching age 65 can expect for at least one partner to
be confined to a nursing home( Wall Street Journal, April 23,
1990).
If you were to become ill or disabled due to sickness or injury,
you may require Special Assistance With Your Daily Activities.
This Special Assistance may last a few weeks, or months , or several
years. Such special assistance is referred to as Long Term Care.
Plans are available for Independent Living (care in your home
only), as well as comprehensive plans that cover Independent Needs
as well as Assisted Living Facilities, Nursing Homes, and Adult
Day Care. You select your lifetime maximum benefit amounts ($75,000
to Unlimited "Bucket of Money" plans).
The maximum Daily benefits can range from $50 to $200, with an
option of coverage from the first day of illness or accident.
Options are available for Return of Premium Rider, Lifetime Inflation
Rider and Survivorship Benefit Rider.
Recently I was asked how much money a person needed to have in order not to need to buy Long Term Care insurance. They indicated they had already asked several people who had told them there was no answer to the question.
If the cost of care is $54,000 per year (about $150 per day) and if you had enough money to generate this $54,000 per year while at the same time reinvesting 5% of your money to offset inflation, you could pay for care forever. Since we have no way of knowing in advance for how long someone will need care, planning for eternity is the only way to play it safe.
Let’s assume the client is realizing an 8% return on their money. After reinvesting 5%, they have 3% left to pay for care. To generate $54,000 at 3% you need $1.8 million. So now we know, it you need $54,000 and you can get 8% per year consistently, you need $1.8 million in order to safely self insure LTC expenses.
Some will no doubt object that you can’t be certain you’ll get 8% on your money every year. Let's assume you can only get 5%. Since you need to reinvest 5% to offset inflation (assuming the annual increase in LTC expenses is 5%) there is nothing left to pay for care, so you need an infinite amount of money to self insure LTC expenses.
Some might also object that most people do not need care for more than 3 or 4 years. That was apparently the thinking behind Consumer Reports' assertion a few years ago that if you had enough money to pay for 4 years of care, that was enough. In this case that would mean you only needed $216,000 in order to self insure the risk.
I noted some years ago that the original $216,000 would have to increase every year to keep up with inflation and assuming a 5% annual increase in the cost of care that would mean you were reinvesting $10,800 in the first year and double that by the end of 15 years. I couldn't help but observe that an insurance premium for most people would be quite a bit less than that and if you bought the insurance you wouldn’t need to reinvest the rest, so you could spend the rest maintaining your lifestyle.
Of course, some might also observe that you might not need care at all, in which case you wouldn't need any money to self insure the risk.
So now we can definitively say that to self insure the cost of LTC, you need somewhere between nothing and an infinite amount of money. I'm glad we could clear that up. More realistically of course, we can see that it would be very aggressive to assume that the $1.8 million I calculated originally would be adequate to self insure a risk for which we have no way of predicting how long it will last and the premium for an insurance policy would be far less that the amount you need to reinvest to offset inflation.
Once again I'm lead to the conclusion, it doesn't matter how much money you have, self insuring LTC expenses doesn't make any sense.
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