Risks of Retiring Without Long-Term Care Insurance

I just read your column in the newspaper of the couple whose 2 million retirement savings is evaporating due to the husband's care needs from Parkinson's. My husband and I also don't have long-term care insurance. What we do have is a living needs rider on life insurance policies for both of us ($100,000 each). Since we are not financially upper crust by any stretch- $700,000 in retirement savings, house paid for, no debt, 30k in emergency savings, ages 62 and 63 and planning to retire at 65- do you think we will be OK?

Lucy

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Hi Lucy,

How do you feel about gambling?

I’m going to list some statistics regarding long-term care below. These aren’t intended to scare you (I promise), but I want to make sure you’re making an informed decision. Many of these figures come from a Morningstar report which you can find here.

52.3% - The percentage of individuals that reach age 65 and will require a long-term care stay at some point in their lives.

0.88 years - The average length of nursing-home stay for men

1.45 years - The average length of nursing-home stay for women

$92,378 - Median annual nursing-home expense for a private room during 2016.

57.5% - The percentage of people turning 65 between 2015-19 that will spend less than $25,000 on long-term care expenses during their lifetimes.

15.2% - The percentage of people turning 65 between 2015-19 that will spend more than $250,000 on long-term care expenses during their lifetimes.

There really isn’t any point in debating the fact that long-term care is expensive. In fact, if you’re located in or around a big city on the east or west coast, you can expect to pay close to double the $92,378 annual figure for your care. When you consider the median net worth of retirees age 65+ is $170,516 (a vast majority of which is home equity, by the way), it’s easy to see why a stay in a long-term care facility of any length is a potentially catastrophic scenario.

A living benefits rider allows a whole-life insurance policy owner to access some of the death benefits before they die. We happen to be discussing a long-term care scenario in this post, and that is one of the common uses of this type of rider. However, to get access to these funds, the insured will typically have to be diagnosed with a terminal condition with a life expectancy of 12 months or less.

Also worth noting, some living needs riders (also known as accelerated death benefit riders) don’t allow for in-home services for long-term care, which is often preferable if it’s an option. This means potentially spending long days and nights in a place other than your home for both the person receiving the care and the spouse who will want to be by their side.

Please don’t misunderstand, living needs riders are a type of solution, but they aren’t an ideal solution for the long-term care risk. Not only do some policies require the care to be provided in a facility, but they sometimes have limited funds (as little as 25% of the policy death benefit) that can be accessed for use. Plus, your life insurance benefit is reduced accordingly when the living needs benefit is used. Besides, not every stay at a long-term care facility is due to a terminal condition, so the funds may not even be available to use. True long-term care policies and even many new life insurance/long-term care hybrid policies do a more adequate job of providing coverage for long-term care situations.

The question you asked, however, is… squishy. Do I think you’ll be ok? If I make some general assumptions based on the information you provided and the statistics I shared, I think you’re much better positioned than the average soon-to-be retiree. This sounds decent until you realize the average soon-to-be retiree isn’t prepared for this situation at all. If you’re comfortable assuming the risk and taking the gamble that you either won’t need to use your policy rider, or will only need to stay in a facility under the most dire circumstances, or will pay for the care from savings as long as possible, then you’ve done some reasonable planning. Know, however, an extended stay (1+ years) in a long-term care facility could potentially wreak havoc with your plan and drastically change both your and your spouse’s financial lives.