Are you considering long-term care insurance but feeling overwhelmed with all the options and details? Look no further! Join us, Bridget and John, as we delve into the nitty-gritty of long-term care insurance, the importance of evaluating its relevance to your unique financial situation, and the factors that impact the decision to get insured.
In this episode of Friends Talk Financial Planning (FTFP), we are armed with insights from the Alliance of Comprehensive Planners and the latest developments from long-term care insurance providers. We discuss self-insuring versus purchasing long-term care insurance, the benefits and limitations of policies, and how this decision ties into your overall financial planning strategy.
Grab a pen and paper, as we bring forward crucial questions to consider, including your family health history, longevity, and even the desire to leave an estate. Whether you're well-versed in financial planning or just starting out, this video is packed with valuable information to help guide you through one of the most crucial insurance decisions you'll make.
Resources:
John's firm website: https://www.trinfin.com
Alliance of Comprehensive Planners: https://www.acplanners.org
#LongTermCare #Insurance #FinancialPlanning #RetirementPlanning #SelfInsurance #EstatePlanning #HealthCare #Aging #FinancialAdvice #FTFP
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TRANSCRIPT:
Bridget: Hey, John. The Alliance of Comprehensive Planners just came out with new information to help us as planners evaluate long-term care insurance with clients and help them figure out if it makes sense for them. At the same time, Genworth, one of the major long-term care insurance providers, has sent out letters to many current clients, saying, “Hey, you're going to have to pay more, or we'll change the policy.” How do you even sort through long-term care insurance. That's what we're going to talk about today on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into the long-term care insurance issue, I want to remind everybody to hit that subscribe button. It helps other people find this content on YouTube. And with that, I'm excited to have this conversation, which maybe a weird thing to say about long-term care insurance, and how to think about that stuff. But just as I'm listening to you describe things in the intro, Bridget, it's confusing. First of all, you’ve got to figure out how this stuff even fits into your financial situation.
If you've made a decision kind of coincidentally, the Alliance of Comprehensive Planners put in two years’ worth of work to come up with some really cool tools to help us figure out or help work through the conversation about how you think about long-term care from an insurance standpoint in particular, as well as other ways of thinking about it. But then at the same time, we're hearing of the letters from Genworth, saying, “Hey, rates are going up so you can take lower benefits or pay more.” And how do you think about this? So really timely. I'm looking forward to digging into things.
Bridget: Yeah. So first, let's talk about the idea of self-insurance, which does not come up when you're buying house insurance or car insurance. Generally, you have to have insurance, often because your mortgage provider requires it, or your state requires it in case of auto insurance. But with long-term care insurance, it's optional. And the likelihood that you need it is actually a lot higher than making a major claim on your house insurance or the chance of you dying when your kids are young, when we recommend term life insurance.
So the chances of you needing long-term care is about 35%. But the chance of actually paying the policy and then having the policy pay off is lower than that. So, for instance, if you have to pay $10,000 a year for long-term care insurance and you pay it from when you're 60 to 80, and then you file a claim, well, you've already paid $200,000. And so, you have a long ways before that policy is going to pay off.
John: Right.
Bridget: So if you had just saved $200,000, that might do the trick in many situations. The other thing that is really important to point out to people is they don't sell policies anymore that are just unlimited, go on forever. So they don't sell a policy to somebody that's 60, and if something happens to you tomorrow and you need to be in a nursing home for 25 years, we'll pay for the whole thing. They used to do that kind of thing.
And that's why Genworth is sending out these letters. It's costing them more to insure people than they were expecting. So I just want to make sure that people understand, because I think that a lot of times people are thinking, “Okay, I have a fear of not being able to pay for long-term care, and I want to buy this insurance policy.” And they think that does everything for them. And it really doesn't. It can help a certain amount, but the policies generally have lifetime benefit maximums and the policies these days generally have lifetime benefit maximums and other restrictions, but that doesn't mean you never want one. What do you think?
John: I want to just pull out a couple of things that you said in there, and I'll start with that last one. Oftentimes we think of the insurance portion of this as the solution. And I think that comes sometimes from how it's being sold to folks. Here's this big scary number of how much it costs, $10,000 a month or whatever the number is in your area, to be in a nursing home, to need long-term care, need assisted living, those sorts of things. And people often think, “Boy, I want to cover all of this.” And I love how you described it. It's a piece of the puzzle. It can bridge some gaps, but it's not the solution.
And if you think in that fashion, it can be more helpful. And then the other thing, I love the comparison of homeowners versus car insurance versus long-term care. What’s insurance designed for? It's not designed for the things that are going to happen. It's for those really high cost and unexpected things—not likely to happen things. We talked a little bit before we hit record. I know I've used my homeowner’s insurance, and I know you have, but it's not because my house burned down, a total catastrophic loss. It was for some other things.
But that idea of having the insurance, not necessarily to put a new roof on, but that if the house burns down, I can replace it. That sort of stuff. And when you get into the long-term care idea, look at the statistics. Something like one in three, one in four people are going to need some sort of help as we continue to get older and live longer. And so, it's more like car insurance. I use the example all the time that your car insurance doesn't do oil changes and buy new tires, because that's part of owning a car.
Instead, it’s for when I get in an accident and need to replace the whole thing, or I've got a liability; it’s those big, unexpected things, not the usual things. So I really appreciate that idea of things with the long-term care and how to think about it. Someone might say, “Oh, golly, it's insurance.” Well, it's not that easy to think about. And then there’s just one other thing I wanted to talk about. You brought up the old policies. As we maybe have talked about a little bit on the show, my dad has a long-term care policy.
He's using it right now as he transitions to memory care. And he's got one of those old school unlimited benefits, so as long as he's around, he gets those benefits. And just a quick point, and we're not going to get to specifics in our show here about what should you do with your long-term care policy, but when somebody has one of those old school policies that's got unlimited benefits, as you mentioned, you can't buy those things anymore.
So before you make changes to reduce or get rid of the insurance, you really need to look closely because it's not like you can make a different choice tomorrow if you change your mind. Having those things can be a golden goose sort of a thing, so you really want to make sure if you got one of those old-time policies from 20 years ago, it could be a really good deal depending on the circumstances.
Bridget: Absolutely. Again, I want to go back to self-insurance. Burt Whitehead, who started the Alliance of Comprehensive Planners and is an inspiration for both John and me, used to have some sort of rule of thumb. I heard about this back 15 years ago and he said, “If you have more than $1.5 million in net worth, you can self-insure.” I don't think John and I are confident enough to make some sort of pronouncement like that, but I do like the cut off. There's some amount, that if you have more than that, you'll be able to come up with the money to pay for these expenses if you end up needing them.
John: Right. One of the other things I remember him saying responds to one of the problems with long-term care insurance: it’s quite expensive. You mentioned $10,000. I think that’s a reasonable number to use as far as annual premiums; it is not cheap. And so, you say, “Hey, listen, here’s this future thing,” or “I could save that money,” or “I’m preserving my estate for my kids; I could give them that money today versus buying the insurance.”
There’re different ways to look at that. And I remember him saying one time, “Long-term care insurance is expensive and the people that can afford it might not need it because they could choose to self-insure and the people that really need it can't afford it.” And then you got people in the middle who maybe want it, but golly, it takes a big chunk out of their retirement income and savings and those sorts of things. It's this real conundrum with how you pay for and think about the dollars.
Bridget: Right. Here's some of the questions that ACP recommends that you ask, and I think John and I both love all these questions. The first one is your family health history, neuro-generative disease and cognitive decline. How are you with that? The next one is anticipated longevity. Now, people generally underestimate how long they're going to live. And so, if you have a feeling about how long you're going to live, you might actually say x plus five.
John: Right. Let me just grab those two, Bridget. If you think about what we're trying to come up with, it's not a yes or no. It's sort of on a spectrum from a scale of one to five. And just from those two things we can make better decisions. What's my family history been? And not that cognitive decline is necessarily hereditary, but it could be. Hey, we've had a lot of people in the family that have had cognitive decline or Parkinson's or these sorts of things, and we've also had a lot of longevity in other parts of the family.
In my genes somewhere, there is a history of some problems and the history of living a long time ago. Those two things put together might lead me to say, “Insuring that might make some sense.” Whereas if I'm on the other side, nobody's ever had Alzheimer's and everybody dies before they're 80, that leads me to think in the other direction. That’s the concept as we look at these questions.
Bridget: Absolutely. Next, family history with long-term care insurance. Some people get long-term care insurance, and then they get into a big fight with the insurance company. And other people have these great policies. They pay off, they help their loved ones through their final days, and then you have the other people who paid for it and maybe regret it, but maybe don't. I think the people who regret it the most are the people who've paid for the policies and have to fight with the insurance companies.
John: Yep.
Bridget: So that's why we're saying, know what this policy says before you commit to it. And don’t think, “Oh, I'm buying a long-term care policy. I can relax now. Everything's taken care of,” because it really depends.
John: Yeah.
Bridget: Next, risk aversion. I think that's an important one. I don't want to risk it.
John: How willing are you to roll the dice? I mean, some people like to insure as much as they can. Other people want to buy as little as they need.
Bridget: I have people who are always trying to get me to invest their money more aggressively. And then some people who think, “Why am I even having anything in the stock market?” And I will try to explain that to them. And as you age, this is one of those personal characteristics that can, what I call calcify, so it can get a little more extreme in you, whichever one you are, and it also can change. So that's an important one.
Current level of financial independence. So how much money do you have? That's basic. Other income sources, Social Security, pension, inheritance, things you forget when you hear these $10,000 a month numbers. Well, I got Social Security and a pension running, showing up every month, so it's not going to be that big of a sweat.
John: And the other corollary to that one, Bridget, I think is here's this expense. Well, it's not like I'm spending zero, and now I got to come up with ten grand a month. I'm already living on some things, and if I need to go into a nursing home, it’s a change, but it's not zero to 100 miles an hour sort of thing.
Bridget: Exactly. And so, people underestimate how little other spending money they need when they're in a nursing home. So that's an interesting thing. Okay. The desire to leave an estate. That's a factor for people. They want to leave an estate. They want to leave money to their kids. And you mentioned before, well, why don't you just give your money to your kids, then if you need long-term care, you can adjust. There're other things, but I think that's another factor. Cost of care, where you live or plan to live. The $10,000 that we're bantering around right now is something that I just heard on the Internet about San Diego. So that's higher than if you live in Chicago or if you live in a rural area or whatever. That's a factor.
Willingness to use home equity, sell a home to fund long-term care needs. Okay, so that's important. And that kind of gets to the next point, too. Willingness/ability of spouse to provide care. How is this going to work with spouse? One of the uses for long-term care is to not deplete funds for the other spouse if something happens to the first spouse. I would say that's a a good use of long-term care. Does that make sense?
John: Yep. Absolutely.
Bridget: And so those are the factors. Willingness, ability of children, family to provide care. Is somebody else going to do this for you? Part of needing long term care or assisted living is just needing help. And so, if you have other people who provide it, that's great. And then financial support for dependents. If you were supporting dependents, then you would want more long-term care insurance, because you're not going to be able to get any money for your dependents. So those are the factors. Again, what you want to look at is where you are on the scale.
John: I love that idea. Maybe that's a good way to wrap up our discussion here. It's not one question. It's not like asking, “Do you have enough money?” And it's not what is your family history? It's a combination of a lot of things that go into making this decision. And I'll just say again that this comes from the Alliance of Comprehensive Planners, where both Bridget and I are members. If this resonates with you, I'd encourage people to check out this network. Bridget and I are taking on new clients and would be happy to help, but if you want to find an advisor in your area, you can check out acplanners.org. And with that, let's wrap things up, Bridget.
Bridget: Yeah. I'm Bridget Sullivan Mermel, and I've got a fee-only planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we leave, don't forget to hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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