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To stop a conversation cold, just ask a group of friends, “Do you ever worry that you might outlive your retirement income?” The response will be nervous laughter. It doesn’t occur to most people to seriously consider this possibility.
The greatest financial risk for depleting retirement resources is an unexpected and lengthy stay in a long-term healthcare facility, like a nursing home or an assisted living center. Common estimates say that about 50% of older adults will need long-term care at some point in their lives; for adults over 65, the odds shoot up to 70%.
Long-term care is expensive. One reason is that the demand outstrips the supply. This means there are often long waiting lists to get into independent living, assisted living, or nursing care facilities. Waits for most of the facilities in my town run from months for studio units to years for larger spacious units.
Not surprisingly, a question I often hear is, “What do you think about long-term-care (LTC) insurance?” If you have a net worth of over $3,000,000, you can probably afford to spend down your retirement nest egg to cover your long-term healthcare needs. But since the care is not affordable for most Americans, it’s a risk that many need to insure against.
Unfortunately, the percentage of Americans that have LTC insurance coverage is just a small fraction of those who are likely to need it. According to an article in The American Prospect, “The Collapse of Long-term Care Insurance,” by Alexander Sammon on October 20, 2020, fewer than 1 in 30 Americans, and only about 7% of those over 50, own a LTC insurance policy.
Why do so few people have LTC insurance? The number one reason is the policies are exorbitantly expensive. Low interest rates, low lapse rates, and rising longevity costs have driven premiums high enough that the annual number of people purchasing LTC insurance has fallen over 90% from its peak of 750,000 in 2002 to 57,000 in 2018. According to a report by Michael Kitces, just a small variation in actuarial assumptions can have a significant impact on premiums. He says, “it’s estimated that as little as a 1% change in interest rates correlates to a 15% required change in premiums to keep an LTC insurance policy actuarially sound. Having a 1% lapse rate instead of a 5% lapse rate can increase future claims for an insurer by as much as 50%.”
This statistic became very real to my wife and me recently. We received a notice of another premium increase for our modest LTC policy that will pay about 50% of the cost of a nursing home. The cost will go up from $3,300 a year to $8,600 a year over the next two years, an increase of 160%. Purchasing a new policy with the same terms would cost even more. When we purchased the policies in 2007, the annual premium was just $1,750 a year, so the 18-year cost increase is just shy of 400%.
Given that cost, there is little wonder why only 7% of Americans over 50 have LTC insurance even though 70% of those over 65 will need long-term care. Because this insurance is out of reach for most, having a personal plan on how you are going to provide long-term care for yourself becomes even more crucial.
How do you go about putting together a long-term-care plan? Knowing how long you may live is just one of the variables to consider. Next week I will dive into the specifics of putting together your own long-term healthcare plan.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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