The purchase of Long Term Care (LTC) insurance is perplexing. New retirees entering the new retirement have a choice of using a chunk to their monthly budget today and maybe never need care or take a hit to their savings tomorrow should they need care and lack coverage.
The contracts are complex, confusing and costly. As with all insurance we need to compare the cost of coverage to the impact on our wealth should we need nursing home care and not have coverage. To reduce the confusion of this emotional and costly product we begin with how we make decisions.
Philosophers, at least since Plato, debated the dominance of the rational mind versus the emotional mind. The argument continues to this day. Recently, scientific studies have been able to identify and measure activity in the parts of the brain associated with the rational and emotional components. Their studies concluded that neither side is preferable in all decision making activities. The rational side is better in some types of decision making and the emotional side in others.
When decisions affect us as individuals, as opposed to studying the external environment, it appears we need to access both the rational and the emotional parts of our brain. This is certainly evident when we attempt to make retirement decisions. In many retirement decisions we must consider uncertainty, the chances of things happening and some roll-up-the-sleeves number crunching then take these results and see how they make us feel. Then we can make a decision.
Long term care insurance qualifies as a zinger for this dual decision making approach. The more emotional/intuitive among us feel the fear of nursing homes, the loss of independence and the lack of dignity quite strongly and would tend to overpay for the insurance. The more rational/calculating denies the feeling that they will end up in a nursing home and even if they do it will not cost as much as making premium payments today. They tend to self or under-insure. A smarter approach would be to balance the two.
First, we look to the likelihood of needing the insurance then determine what the likely cost is. Then we can use our internal calculus, our emotional decision maker, to see if it is worth it. Though the cost may be the same for two individuals, the emotional calculation may be different where one person sees it as a deal and the other as too costly. Both are right. But, first determine the cost.
The California Department of Health Services states there is a 40% chance of spending some time in a nursing home. 90% of stays are for one year or less. These statistics should be considered when comtemplating purchasing policies with multiple years or lifetime coverage.
Also, it should be noted that 64% of the stays in a nursing home are for less than 2 months. These stays tend to be the result of suffering an event that lands us in the hospital and we end up in a period where we are not sick enough to stay in the hospital but too sick to go home. In many cases this gap is not covered by traditional health insurance.
The average cost for stay in a nursing home nationwide is ,000 per year. But, in major cities the cost is more than double. New York City the cost is 0,708, San Francisco ,820 and the ten biggest cities in the country are all over ,000. These costs tend to increase faster than inflation. But, to get decent care from qualified people, in a major urban area 0,000 is a good starting point for what you can expect to pay.
As our rational mind kicks in, the math tells us that our expected cost is the chance of going into the nursing home times its costs.
To get a sense of the dollar risk we multiply the chance of going into a nursing home 40% times the average cost of the stay 0,000 to get the amount we would be willing to pay. ,000 (0,000*.4) can serve as a reference point for the most we should pay. Readers can apply this logic to their local costs.
In a typical LTC policy a 40 year old paying annual premiums and begins using the insurance at age 80 will pay about ,000 over the forty year period, a fifty year old will pay ,320 and a sixty year old will pay ,000 in premiums prior to using the insurance at age 80. To get a value the total premiums paid should be less than the expected cost.
Even if the policy may be cost effective, it still may not make sense for a number of people to purchase it. Here we looked at the impact on the cost to our income and budget. Part II looks at the cost to our savings or net worth. To make an effective decision we need to look at both.
Tags: emotional components, emotional side, lack coverage, lack of dignity, long term care insurance, monthly budget, nursing home care, rational mind, retirement decisions, term care insurance