Is $92,000 per Year Pocket Change? Why You Should Discuss Long-Term Care Insurance with Your Clients

FAs often ask me the following which is a very good question. What exactly is long-term care?  According to the U.S. Department of Health and Human Services: “Long-term care is a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life…”

Key takeaway:  long-term care insurance is not health insurance. The two are completely different.  

Will my clients need long-term care (LTC) Insurance? Unfortunately, odds are they will.  Whenever you have a client who turns sixty-five, there is an approximately sixty-six percent chance that person will need LTC at some point in their life going forward. However, one-third of this group will never need it. That’s the good news. The bad news? Twenty percent of those turning sixty-five will require some sort of LTC for more than five years.¹

Key takeaway: because eighty-five percent of FAs are men, just a reminder to guys to keep the following top of mind: Women need care longer (3.7 years) than men (2.2 years).

Is LTC Insurance costly? That depends on what you and your clients regard as “costly.” Premiums for LTC Insurance are all over the map. Insurers calculate these by your age and dozens of options included— or not included— in the policy such as annual limits of payouts, the extent of disability, a private vs a semi-private room, etc. Premiums can range from less than $1,000 a month to as high as $6,000 a month or more. Like health insurance premiums, LTC premiums can increase dramatically from year to year.

A major factor affecting the cost of your premium is where you will be living in retirement.  Cost of care for someone in a nursing home can be radically different depending on location. In South Florida, the annual cost of a private room in a nursing home can run as high as $120,000 per year vs $79,000 in rural South Carolina.² Your premiums will reflect this difference.

The average cost per year for one person in a private room in a nursing home is $92,000.³ This could be pocket change to many of your clients but perhaps not all. Even your HNW clients will need big, strong pockets for that much change or their pockets will tear and who wants torn pockets with money falling out?

Your client will probably need more than $92,000 since a HNW client presumably will opt for the very best care in a private room or a small apartment at the very best nursing home. For planning purposes, you might want to increase the $92,000 estimate to $130,000 or more.

What about the tax treatment of premiums and payouts? Depending on your balance sheet, premiums paid for LTC policies can be deductible. Payouts from the policy can be free of income tax. However, there are restrictions and exceptions. You can download IRS publication 525 and read more. We are not giving tax advice and your client should consult their CPA.⁴

Should you recommend LTC Insurance to your clients? That depends on many factors so we can’t come down on one side or another. Instead of paying LTC insurance premiums your clients may decide to chance it. After all, one-third of people over sixty-five will not need LTC insurance. Are these good odds? Only you and your client can determine this.

A good rule of thumb comes from the late journalist, Damon Runyon, who said, “The race is not always to the swift, nor the battle to the strong, but that's the way to bet.”

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Resources: 

1 https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

2 http://www.aarp.org/relationships/caregiving-resource-center/LTCC/

3 http://health.usnews.com/wellness/articles/2016-11-16/how-to-pay-for-nursing-home-costs

4 https://www.irs.gov/publications/p525/ar02.html

Contributing Writer: Subject Matter Expert Charles McCain