Long Term Care Insurance Blows Up?

Another insurance product with serious drawbacks

The Wall Street Journal had an article about the sad state of affairs with premiums skyrocketing for long term care insurance and the problems it is causing for many people faced with either paying through the nose (more than they already have?) or stopping their coverage thus having wasted money. For disclosure, I don't have an active insurance license and I have never sold an insurance product.

The concept, even if not the policies themselves, is pretty straight forward. Long term care, if you need it, is expensive. If you buy it very young, the premiums are very cheap but you're paying for many years and you may end up not needing it. The WSJ article say 48% of people end up not needing it. If you buy it when you're older, it is more expensive but you pay for a shorter time. There are theories as to the best equilibrium point to start coverage.

This chart is useful. Just over half the people who need long term care need it for two years or less. Based on the Journal's estimate of it costing $100,000 per year out of pocket, a retirement plan/portfolio with a sustainable withdrawal rate could have $200,000 remaining when someone might need long term care. With luck in terms of sequence of returns or avoiding the full brunt of a large decline, combined with a reasonable withdrawal rate, you are likely to die with money in the bank. Plug your numbers into a few different retirement calculators and assume low rates of return. Where does it have you at 95?

This is far from infallible and who knows what the cost of care will do but if you're likely to die with money in the bank, have good genetics for being unlikely to need long term care and can make lifestyle choices related to diet, exercise and stress management that might further reduce the odds of needing long term care, maybe you don't need the insurance.

One simple strategy to pay out of pocket could be to not touch a Roth IRA in retirement, just act like it is not there in terms of paying for retirement. Fund it when you're young of course, and manage it (or have someone do it for you),just don't spend it if that is possible.

There is no right or wrong answer here, only what you think is best for yourself but take the time to get informed.

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