Preparing for the High Cost of Long-Term Care

In a recent survey conducted by AARP, the findings showed that there is a clear disconnect between what most people think long-term care costs and the actual cost of care itself. In fact, after surveying 1,456 people over the age of 45, only one in 12 came within 20% of estimating long-term care costs accurately. Most felt that only $500–1000 a month would do the trick nicely.

I find a similar unrealistic outlook when I work with folks and try to help them develop a plan for their long-term care needs. Quite often, they are shocked when they see the premium cost for a long-term care policy, especially if they happen to be in their sixties or seventies.

But there are two very important reasons that LTCI costs as much as it does. One is that the costs of care in this industry are rising more than 5% annually on the average, and have done so consistently for several years now. For the most part, average inflationary costs for the rest of the economy averages around 2–3% a year. But that is not the case with health care—especially long-term care.

To put those figures into perspective, a 5% inflationary measure means costs double every fifteen years or so. So if facility costs are $150 a day in your area today, in fifteen years they will most likely be around $300 per day. And in fifteen more years, that figure balloons to $600 a day.

The questions that each person must ask themselves about preparing for that kind of expense are whether they have the funds available now to pay for their care, and whether they will have the additional funds in the future to make up for the increases caused by inflation? Will those funds be liquid enough to be accessed quickly and without major financial loss to necessary retirement income?

The second reason that LTCI costs as much as it does is that it is one of the most commonly used forms of insurance that you can buy. A MetLife Mature Market study conducted in 2000 revealed that out of 1,000 people age 65 and older, only five will ever lose their home to a fire. Only 70 will experience an auto accident that requires them to file a claim on their auto insurance. But in the same age group, 600 will require some form of long-term care.

It saddens me when I see so many people working so hard to put away money for their retirement years, and yet not understand the single greatest risk to their retirement income that exists.

I encourage everyone to take a hard, realistic look at the rising costs of long-term care and start as early as possible to prepare to meet the financial challenges ahead.

Until next time...Duane

Posted in Advanced Planning, Assessing your Financial Picture, Financing Long Term Care, Long-term Care Insurance (LTCI), Why and When to Purchase