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We spend our entire working lives socking money away for our golden years. But it can all be for nothing. The highest-quality, most well-crafted, and perfectly diversified portfolio does nothing to mitigate one enormous risk we all face.
It isn't what you might expect
Two hints: It's not inflation, and it's not taxes. The biggest risk to your nest egg is a long-term care event. And with the average cost of long-term care in an assisted-living facility at $3,300 per month, a $100,000 nest egg could be wiped out in two and a half years. For a private room in a nursing home at an average daily rate of $222, $100,000 will last you 15 months. Still worse, the cost of long-term care has increased 4% to 6% annually for the past five years.
Advances in medicine allow us to live longer, but they've increased our need for care when we're old and worn out. And if acute diseases like heart failure don't do us in, the chronic ones like Alzheimer's and cancer eventually do. In the process, they'll extend the number of months -- maybe years -- that we'll likely need long-term care.
The four options we have when facing a long-term care event include spending down our assets, relying on family, going on Medicaid (not to be confused with Medicare), and buying long-term care insurance. Policyholders typically cite "not wanting to be a burden on family" as the main reason for purchase.
I hate paying for something on which I may never see a return, but consider the following:
- Odds of your home burning to the ground (total loss): 1 in 16,000
- Probability of totaling your car: 1 in 100
- Odds of meeting a $2,500 medical insurance deductible annually: 1 in 25
- Probability of needing long-term care at some point in your lifetime: 1 in 2 for a woman; 1 in 3 for a man
We wouldn't go a day without owning home, auto, or health insurance. But statistically speaking, the probabilities of such adverse events occurring pales in comparison to that of needing long-term care.
Long-term care insurance basics
Health insurance and Medicare help pay for immediate medical expenses, whereas long-term care insurance helps people cope with the cost of chronic illnesses. Long-term care insurance typically covers out-of-pocket expenses that come with home care, assisted-living facilities, and nursing homes. The policies pay for help with everything from the basics, like dressing and bathing, to skilled care.
A long-term care insurance policy creates a pool of money for your future use. How big the pool is depends on the size of the policy; the larger the pool, the bigger the premiums. How fast the pool is consumed depends on what type of long-term care is needed and how often it's needed.
Long-term care insurance can be purchased either as an individual plan or part of a group plan. Many employers offer group long-term care insurance with the benefits of group plans including inexpensive premiums and no need for medical underwriting. However, group policies only cover you while you work for your employer. Individual policies are preferred because you retain the policy for your entire life.
On the whole, the underwriting process is getting more conservative, and rejection levels are higher than they were just five years ago. Medical records are reviewed in the underwriting process, and a phone screen including a memory recall test is typically involved. When considering an individual policy, keep in mind that the premiums steadily increase after age 60.
Prudential Financial (NYSE: PRU ) and MetLife (NYSE: MET ) stopped selling new individual long-term care policies, and they're not alone, as other writers of individual coverage have also announced their exit from the industry. From a business perspective, losses from underestimates of life expectancies have hurt the insurance companies, but insurers' actions leave a sour taste in people's mouths, as do recent premium increases that have affected many policyholders.
Hopefully, now that insurers have factored in the impact of low interest rates on their ability to generate income to pay claims, the majority of rate increases should be over. Look for insurers with solid financial statements, exhaustive actuarial data gathered from tenure in the business, and insurers that conduct significant business in your state.
Manulife Financial (NYSE: MFC ) and Genworth Financial (NYSE: GNW ) are leading long-term care insurance companies that are continually highly rated by consumers. Manulife and Genworth have been insuring against this risk the longest; Genworth pioneered the business in the 1970s and is the company behind AARP's long-term care insurance offerings. Manulife and Genworth are among the most conservative underwriters in this business. Your situation may vary, but for my part, I would feel most comfortable with one of these two companies, either as a prospective policyholder or as an investor .
Not for everyone
Long-term care insurance is not a one-size-fits-all solution. In my years as a financial advisor, I've seen cases where it made a lot of sense and others where it just didn't. But do yourself and your loved ones a favor and evaluate this for your own situation.
If you're looking for more ways to position yourself for a fulfilling retirement, read the eye-opening free report crafted by my Foolish cohorts: "The Shocking Can't-Miss Truth About Your Retirement."