Q. When I meet with a couple who are considering self-insuring the long-term care risk, how can I explain to them that this may not be the best solution?
A. Overcoming the self-insuring objection can be challenging. That’s why I really liked the approach — shared by Beth Ludden, vice president, long term care insurance, at Genworth — that clearly illustrates the impact on a client’s portfolio from these unexpected expenses.
The concept is based on a couple who retire at age 65 with $2 million in assets. They plan to use the growth from their portfolio to cover their living expenses and still leave a sizeable inheritance to their children.
Here’s how Beth explains the concept:
- In 2014, the couple retires with a $2 million portfolio.
- To cover living and lifestyle expenses, they withdraw $100,000 annually. This amount is increased by 3 percent annually for inflation.
- The stock market continues to fluctuates, but the couple’s investments are pretty stable.
- Then, in 2029 – year 15 – the husband has a LTC event (for example, a stroke or a diagnosis of Alzheimer’s disease). He and his wife are determined that he will remain at home as long as possible.
- The husband receives 44 hours of home care each week. The cost for the one shift a day is $99,375 per year.
- Year 2 – 2030 – He has gotten worse, so he is now getting home health care for two shifts a day or 88 hours a week. The annual cost is $189,788.
- Year 3 – 2031 – His condition continues to deteriorate so he now needs 24-hour- a-day home care. The annual cost is $380,438.
- Year 4 – 2032 – His wife is now having health problems of her own, so the family decides to move him to a nursing home. The annual cost of a private room in a nursing home is $195,008.
Total amount spent for the four years of care – $855,609.
Their retirement account is unable to recover from the extended care costs as a result of exceeding the growth. They had raided the principal, which has been generating their income, and it has now been sizably reduced.
The wife, who is aging and may have encountered her own health problems due to the strain and stress of being a caregiver, now has the additional burden of worrying how she will be able to afford to maintain her lifestyle and pay for her own extended care costs.
Conclusion: A $2 million portfolio can be severely drained if even one spouse has a serious LTC event. The solution it to mitigate that risk with an LTC policy.