Long-Term Care Insurance
Revised By: Elizabeth Silvestri, CFP^®
The Henssler Financial Group Position Paper

A rule of thumb for buying long-term care (LTC) insurance is to consider buying it if your net worth is between $150,000 and $1,000,000. However, this is simply a rule of thumb. If you do not have a considerable amount of money you should not buy LTC insurance. Likewise, if you have the financial wherewithal to pay for your own long-term care expenses, we recommend that you do not purchase LTC insurance.

If you start making LTC insurance payments at age 58 on a policy paying $40,000 per year, the annual payment would be about $1,500. An alternative to making those insurance payments would be to invest those $1,500 payments into a tax efficient investment earning 8.5% through age 85. Under these assumptions, the account would grow to $150,000.

Why Self-Insure if You are Able?

The principal reason to buy insurance is to cover catastrophic events. Normally, you should not insure items that you can deal with yourself. If you are able to "self-insure" (i.e. have sufficient funds to pay for LTC expenses should the need arise), our advice is to direct the money that would be spent on LTC insurance premiums elsewhere, such as building your estate. For example, to self-insure annual expenses of $40,000 for five years, it would require a portfolio balance of $186,000 earning 8.5% with inflation running 4.6%.

To get a better idea if LTC insurance is needed, you should have a cash flow projection run by a financial adviser. For example, assume you would like to be able to afford a nursing home costing $35,000 annually. Further, assume the LTC policy under consideration costs $2,000 annually. If you are currently spending $50,000 annually, and the cash flow projects your annual maximum spending to be $54,000, you should consider the insurance. The projection shows that you could not afford this nursing home if you had to pay it out-of-pocket, so the insurance is necessary. In this same example, if the cash flow projects your maximum spending to be $150,000 annually, you should be able to afford the nursing home without the insurance. This type of analysis should help you decide if LTC insurance is needed or not.

The use of long-term care insurance in your financial plan is partially a subjective decision that involves more than just financial analysis. The cost of LTC is a function of age, health, coverage options selected and amount of coverage for each of the options selected. Like most financial planning issues, the best financial decision requires answers to questions that can only be estimated before the fact.

Unless there are known extenuating circumstances with regard to your projected future health, we recommend getting cost and coverage estimates sometime between ages 53-57. We would then work with you to help you understand through the use of cash flow projections the implications of buying or not buying LTC insurance. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.