A long-term care (LTC) event may very well be the single most devastating event that could befall your clients in retirement. It can be so devastating that, from a financial perspective, your clients could be better off dying than needing long-term care (and I mean that in the most loving way possible). Here’s how I break this news to my clients:
Me: “Mr. Jones, you know we love you, right?”
Client: “Yes, I know you love me.”
Me: “We do love you, but you’re better off dying than needing long-term care. Here’s why: Were you to die, all of your assets (401k, IRA, mutual funds, etc.) would go to your wife who is your beneficiary. And, while we would all miss you terribly, Mrs. Jones’ life from a financial perspective would continue along relatively unchanged. However, if you didn’t die but needed long-term care, all of the sudden, much of the money she was planning on using in retirement now gets earmarked for the long-term care facility.”
At this point Mr. and Mrs. Jones gulp audibly.
Me: “Here’s how it works: Before the federal government will step in to pick up the cost of your long-term care, your estate goes into what we call ‘spend down.’ Your wife becomes the ‘community spouse’ and may be left with just one house, one car, a Minimum Monthly Maintenance Needs Allowance (MMMNA), which in most states averages around $2,500 a month, and around $117,000 of assets. So, what was shaping up to be a pretty rosy retirement for your wife, can now turn into a bare-bones sort of lifestyle.”
By this time their eyes are like saucers and their mouths have drooped into their laps. But it gets worse.
Me: “Now, the same holds true for you Mrs. Jones. Were you to need long-term care, all of your and Mr. Jones’ cumulative assets go into spend down and he becomes the community spouse. He too may have to find a way to get by with only one house, one car a MMMNA of $2,500 a month…etc.”
I take such a direct approach because my clients desperately need to embrace two realities:
- There’s a 70 percent likelihood that one of them will need long-term care during their lifetime.
- The costs of long-term care can, in a very short period of time, devour a lifetime of savings, leaving the community spouse and their heirs financially devastated.
If all this is true, why don’t more people have long-term care insurance? There are three main reasons:
- High Expense: Long-term care insurance for a husband and wife can be pricey. What’s more, there’s no guarantee that the insurance company won’t raise the premiums down the road.
- Hard to Qualify: Qualification for a long-term care policy is based on morbidity (likelihood that you’ll need long-term care), not mortality (longevity). You might very well live to be 120, but if you have a bad back, bad knee, etc., you may not even qualify.
- Use it or Lose it: Most people dread paying for something they hope they never have to use. With traditional long-term care insurance, if you die peacefully in your sleep 25 years from now never having needed the coverage, they don’t send you your money back. It goes to pay for someone else’s benefit!