Long-Term Care Insurance and the Real Cost of Self-Insuring

Financial professionals realize that Medicare doesn'tsubstantially more than the clients were anticipating.
cover long-term care and that it's a bad idea to giftIn addition, if high net worth individuals have a combined
assets to qualify for Medicaid or MediCal (in California).state and federal marginal tax bracket of just over
The Deficit Reduction Act of 2005 tightened loopholes37%, the could incur an additional tax liability of
that allowed people to transfer assets to their children$610,000 if they take large enough distributions from
so they can qualify for Medicaid benefits.their qualified retirement plans to cover the cost of
Self- insuring for high net worth individuals needs to becare. The cumulative distributions could exceed $2.27
addressed. Long-Term care specialists need tomillion to cover this care event. If the long-term care
provide the proper information so that the clients canevent was for only one spouse and the second
make an educated decision about long-term carespouse lived on another five years after the first
insurance. It is important to calculate the real cost ofspouse's death, the second spouse has lost the use of
self-insuring and communicate it to the client.the $2.27 million which was spent caring for the first
It is dangerous to ignore the inflation factor whenspouse.
planning for Long-term care. Let's look at a marriedSo what is the cost to insure this risk? What is the
couple in their mid 50's with $2 million of liquid assetscost of purchasing a long-term care insurance policy
not including their primary residence. At first glance, theas a hedge against the risk of needing long-term care?
couple considers what their liability would be at today'sIf the couple is in good health, they may be able to
rate. The average daily rate for a nursing home inpurchase a State Partnership long-term care insurance
California is $210/day. So, now the couple does somepolicy with a $210 daily benefit, a five-year benefit
quick arithmetic and arrives at an annual cost ofperiod and 5% compound inflation protection for a
$76,660 with a potential 5-year cost of $383,250.00.standard rate annual premium of approximately $2200
They quickly conclude that they can easily afford toyear per person. The couple would pay a total of
self-insure when they compare the 5-year cost of$132,000 over 30 years to insure themselves against
$383,250 to their $2 million liquid net worth. Thethe $2.27 million in long-term care costs.
problem with this is that the couple didn't come close toTo be totally honest and fair, you can even take into
the true cost of self-insuring. To do that they wouldaccount the lost investment opportunity on the
have to do the following:o Adjust today's cost of carepremium. Assuming an after-tax rate of return of 4%,
for inflationo Consider the potential tax consequencesthey would lose an additional $124,000 of investment
of taking a qualified plan distribution or selling as assetreturn, bringing the true lifetime cost of purchasing
that has appreciated in value to pay the cost oflong-term care insurance policies to $256,000 when
care-out-of-pocket.o Account for lost investmentpaying for 30 years.
opportunity on the money that was spent self-insuringIn conclusion, when most high net worth individuals
during the five years they pay for care.understand the true cost of their choices, they see that
Now, let's look at the real cost of care with the couplelong-term care insurance is an extremely
living another 30 years. This would be the approximatecost-effective hedging strategy. It is important for the
time one of them may need long-term care. Today'sindividual to understand the financial impact a long-term
expense of $210 per day could grow to more thancare event brings to brings to their retirement. That is
$900 per day 30 years from today. Multiplied out overwhen you see the real value of long-term care
a five-year care event, this would result in aninsurance.
out-of-pocket expense of $1.66 million, which is