Should I Buy Long-Term Care Insurance or Self-Insure? – YMYW podcast


Tom from Colorado is on. Tom: Hi my name’s Tom. My wife and I are both in our early 60s. I’ve been reviewing long-term health care
policies and they don’t really seem to offer a lot of coverage. And I wondered what the analysis is, what
kind of financial analysis, in terms of whether I should purchase long-term care insurance
or just self-insure that and invest the money to have it there for if and when it’s needed. We have enough assets to self-insure but I’m
not sure that’s the wisest thing to do and I’m trying to evaluate this risk. Thank you so much. I appreciate you taking my call. All right Tom, thanks so much for giving us a buzz. Andi, I think we need to send Tom a book called… Think, Act. and Invest Like Warren Buffett
by Larry Swedroe. All right, making a note. Yes. Tom gets a book. All you gotta do folks is just leave us a
message and you get free gifts. All right Alan, what do you think? Because Tom is sitting in the same boat that you’re in. Yeah that’s that’s true. I’m in my early 60s and that’s a decision
that you’ve got to look at. So here are a few things I might say, and
that is the long-term care insurance, relative let’s say 10 years ago, is a lot more expensive. And the benefits have reduced significantly. And the benefits have reduced. So the actual act, getting those policies,
it used to be clearer. Now it’s not as clear to me that there’s a
huge benefit. I would say this, honestly, if you can self-insure,
there’s nothing wrong with that. It’s just a matter of it’s an insurance – if
you want to have the insurance company handle some of that risk, like any insurance policy,
if you end up needing it you’ll be very happy you have it. If you don’t need it you’ll be thinking, “why
did I do this?” But here’s the analysis, Tom, just take a
look at what the premium is. So you’re in your early 60s, you’re probably
not going to need this benefit for, what, 25 years. Okay? Alan’s going to need a benefit probably a
lot sooner than that. (laughs) (laughs) that’s probably true. So let’s say that you buy a policy for $10,000
a year, hypothetically, for $300,000 in benefit. I have no idea. I don’t know what he’s looking at. I don’t know what his elimination period is,
I don’t know if he’s getting it with his spouse, to get a spousal discount – there are all
sorts of iterations on how you can buy a standalone long-term care insurance policy. And let’s just explain what that is first. A long-term care policy works as – if you
have one of your activities of daily living, I guess two out of the four. I think there are four, I’m not an insurance
agent but I think there are four. I think there are four too. If two of those go bad, you can’t bathe yourself
or clothe yourself, can’t get out of bed, can’t transfer, can’t move… right? And continence? Eating, bathing, dressing, toileting, transferring,
and maintaining continence. OK well  I guess there’s a little bit more
than four. Six of them. Six. So if two of those go bad, then the long-term
care insurance would trigger. If you have it. So now you need help – you need someone to
help do one of those activities of daily living. And so you can go into a home and have full
time care, and that full-time care  – in Colorado, I don’t know, I’m guessing it’s
going to cost you 60 to $80,000 a year depending on where you go. You could probably go to a really nice place
and it’s going to cost you a couple hundred thousand dollars a year, or you could go somewhere
that’s not so nice and it probably cost you $50-60,000 a year. So on average, the average person’s long-term
care stay is roughly four years. So if it’s going to cost you $50,000 a year
for four years, you know you can do the math somewhat easy. That’s going to be $200,000. So you could say this: all right well $200,000
is what that need is in today’s dollars. So that is also going to increase with the
cost of inflation of probably close to, what, 7-8%. So that $200,000 is going to be roughly $400,000. You following my math here folks? Just barely. I got it. I’m with you. All right. Thank you. So what Tom needs to do is say, well what’s the need? In future dollars it’s going to cost me X.
$400,000 of money that needs to come from somewhere to pay for the care. So he can insure it by buying a long-term
care policy and saying, I want to cover that need by either 100%, 50%, 30% whatever he
wants to do. So maybe it’s a little bit of self-insure
like Al suggested, maybe you fully insure, or maybe you do somewhere in the middle. So you do somewhere in the middle and you
say, “I want to cover half of the cost.” So you need $200,000 of benefit, hypothetically. Then you look at what’s the premium going
to cost me to get this $200,000 of benefit? And if that cost is $5,000 a year, $10,000
a year, whatever it is, you take that premium dollar that is going to go to the long-term
care policy and then you say, let’s say I invest that premium versus buying the policy. What rate of return do you need to generate
on that premium dollar to get you to the same pool of money that you would have as the long-term
care policy would pay out? Does that all jive? (laughs) Let me make it simpler. That was simple! I know but I’m going to go back to my answer,
which is when you do all this math, what you’re going to find is that by the time you add
up all your premiums and put in a rate of return, that sum total is going to be less
than your benefit. So in other words, if you need it, you’re
going to be glad that you have it. If you don’t need it, it’s wasted money. That’s what you’re going to find after you
do all this. And you’re absolutely right. That is the way to do the calculation. Yeah. Because I think that’s what he was asking. He’s like, “financially speaking, how do I
calculate this, how do I calculate the risk?” Well, the likelihood of you going into a long-term
care facility, Tom, is probably pretty high. I mean, it’s higher than other types of risks. And high means, I don’t know, maybe 50%? Yeah some like that. It doesn’t mean it’s going to be four years,
it might be a few days. It could, yeah. You break a hip, right? Or you could be like Christopher Reeve and
be in there for 20 years. Who knows. Or maybe you die of a massive heart attack
or you die peacefully in your sleep. Yeah. And you don’t need it. Yes. But the fact of the matter is that long-term
care premiums, or that the benefit, is tax-free. So you got to do a breakeven analysis, but
you’re absolutely right, Al. It’s just like I have home insurance and I
pray that my house doesn’t burn down. (laughs) Actually it’s even more than that – longtermcare.acl.gov
says someone turning age 65 today has almost a 70% chance of needing some type of long-term
care services. Yeah but that also could be an in-home service
person that comes in once a week and washes your sheets so it doesn’t… (laughs) My god I just had the sickest thought
in my… oh my god. (laughs) Of course you would. (laughs) Oh boy. Washing Big Al’s sheets, I mean that would
– I would want to get paid a hundred grand a washing on that. See, and this is why you don’t want to inflict
that upon your spouse. Oh my goodness gracious.

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