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Thayer Partners Blog

Do You Really Need Long Term Care Insurance?

[fa icon="calendar"] Jan 18, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Do_You_Really_Need_Long_Term_Care_Insurance.jpgGrowing older is scary. Even though you’re excited for retirement, you might be concerned that some unexpected expenses will ruin your savings and leave you without any means to sustain your lifestyle. A serious accident, a debilitating illness, or just old age itself can make you unable to care for yourself. And the high costs of healthcare can crumble your retirement plans.

Long term care insurance can help pay some or all of the costs associated with an assisted-living facility, nursing home, or home healthcare if you were ever to be unable to perform day-to-day activities.

Though people used to buy this insurance because they were scared of being financially ruined due to long term care costs, people are now scared of the policies themselves. Premiums are increasing at a rapid rate and it’s getting more difficult to find products to suit your unique needs. But the alternative—paying for long term healthcare costs out of pocket—is a risky move that could devastate your retirement savings.

If you’re currently planning for your retirement, whether or not to invest in long term care insurance is probably a battle that you’re facing. You might be wondering if it’s really worth the cost. The question is: do you really need long term care insurance?

Won’t Medicare Pay?

Many Americans mistakenly believe that they’re already covered and don’t need to invest in a hefty long term care policy—Medicare will pay for required assistance if needed in the future. Contrary to this popular belief, Medicare does not pay for long term care.

However, Medicaid might pay for it, but only for retirees who have exhausted their assets and meet very strict criteria. Though Medicaid is an important safety net, it should not be your first line of action. You shouldn’t put all your eggs in the Medicaid basket as a fallback.

Paying For Long Term Care Out of Pocket: Wise or Foolish?

If you’ve accumulated a nice retirement nest egg, you might think that you could just pay for long term care costs on your own. But this care doesn’t come cheap. According to the 2015 Cost of Care survey from Genworth, the average annual cost of a private room at a nursing home is a whopping $91,250, while the average annual cost of a home healthcare aide is $45,760. Can you really afford to pay this for several years?

Tax-Free Growth on Your Policy

Buying long term care insurance is beneficial because you will receive tax-free growth. For example if you are healthy and 65, place $100K in a single pay premium long term care policy, and need long term care in your mid-80s, the guaranteed tax free growth on that $100K benefit will be about 6%, which is probably higher than you could hope to receive if you were to set aside the same $100K in a typical retirement account of stocks and bonds. Economically, it makes less sense to self-fund your long term care needs. The money is unlikely to grow to the same amount as what the insurance company guarantees. And even if it did, you’d still have to pay taxes on the gains whereas a long term care benefit paid out of an insurance policy is tax free.

Increasing Life Expectancy

You’re going to need to stretch your retirement income as you have a better chance than ever to reach 100 years of age. When your retirement funds might need to last you for 30 or 40 years, you might not be able to afford costly long term care expenses. And the odds are very high that, eventually, you’re going to need such assistance in your future. In fact, According to the U.S. Department of Health and Human Services, 70% of all 65 year olds today will need long term care at some point.

Consult with a Retirement Expert

Though we believe buying the right long term care insurance is a wise choice for many people, it’s prudent to consult with a retirement expert. Long term care policies are complex and seeking professional help can help you to ensure that you’re getting the best policy for your needs.


Topics: Long-Term Care

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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