A simple definition of Personal Financial Planning is risk control. And a large part of controlling risk is insurance planning. If we’re talking health insurance, the risk is poor health or disease. If we’re talking homeowners’ insurance, your risk is other perils that affect your property. Income protection is done with life insurance and disability insurance.
It is your income that affords you the lifestyle you don’t want to lose. Most people go into debt in their early years to buy homes and cars, raise and educate kids, and accumulate assets toward retirement. An untimely death can interrupt the repayment process before it is concluded. That’s what life insurance affords you – the completion of paying off your indebtedness, along with substituting for your income.
If we stay healthy, plan correctly, and are diligent, our debts will eventually be repaid. At that time, the need for life insurance diminishes or disappears, and policies can often be allowed to lapse (or with term, they will become prohibitively expensive anyway). I have a really good use for the freed up cash flow that results from ending your life insurance payments.
There is a new risk that pops up at that later stage of life, and it isn’t cheap. That is the risk of spending down the assets you spent a lifetime accumulating. In fact, the number one fear of older people is running out of money. Something needs to be done to handle that risk and prevent becoming destitute. That something is Long-Term Care insurance, or LTCi, and it is expensive.
But it can save your financial life! LTCi is one of the least understood forms of insurance, and one of the most important for your long-term financial success. We will visit LTCi various times over the next several weeks.
I usually begin a discussion of LTCi by describing what is NOT LTCi, which requires a quick explanation of what isLTCi. LTC insurance pays for care in a nursing home, or for home health care professionals to tend to your needs while you are at home. The definition of needing LTC service is when you are unable to perform 2 or more ADLs (Activities of Daily Living).
So what IS NOT LTC insurance, and won’t pay these bills? Virtually everything, unfortunately, is not LTC insurance:
- Your health insurance won’t pay, and Medicare won’t pay (after the initial hospitalization period)
- Disability insurance isn’t going to help, and your life insurance in most cases won’t pay a penny
- Medicaid will eventually bail you out, but only after you have diminished your fortune to bare subsistence level, undoing a lifetime of asset accumulation
- Which is why I call LTCi “wealth insurance”
How fast will needing care reduce your assets? The average cost of nursing care in the USA is nearly $100,000 per year per person. At that pace, the average person won’t last too long paying the bills by himself or herself!
So how does one get LTC insurance? Believe me when I say it is getting more difficult, as well as more expensive. Underwriting is more severe than ever, and experience inside the large insurance carriers is showing that policies have been underpriced historically. What was somewhat expensive is now more expensive.
Reality is a bear sometimes. And care is expensive, so LTCi is as well. There will be much more on this topic over the next several weeks, including a look at LTC from the providers’ standpoint. We will also look at alternatives for financing LTC.
If you have any thoughts on LTC or LTCi, call the show on Saturday morning at 10:00 AM, the number is 904.222.8255.