I volunteer at the Virginia Cooperative Extension where I
occasionally teach classes on money management.
(It is a very worthwhile and inexpensive class held in six sessions over
as many weeks. If your employer sponsors
the class, it might even be free to you.
Call the local office of your state’s agency to see what’s offered in
your area, or ask your employer to sponsor a series with the local agency.)
In one unit we teach about different types of insurance and
offer tips on evaluating and purchasing policies. We employ a simple but effective grid for
determining the need for insurance. It
is not based on the cost of the policy, though that is an underlying factor;
rather, it looks at the potential cost of the hazard if it were to occur
together with its probability of actually occurring. The grid looks something like this:
|
High Cost/Low
Probability
Recommendation: Transfer the risk (i.e. buy insurance)
|
High Cost/High
Probability
Insurance is likely not available
|
|
Low Cost/Low
Probability
Self-insure, i.e. use savings to cover any loss
|
Low Cost/High
Probability
Self-insure, i.e. use savings to cover any loss
|
I thought of this tool when I read a Wall Street Journal article last week about the rising cost of
long-term care insurance. These policies
are meant to protect against the costs of nursing home stays, assisted living,
and personal aide/home health services.
They have never been cheap, in my opinion. But now insurers who sold these policies to
middle-aged people twenty or thirty years ago suddenly find themselves with
claims to pay and have, in some cases, nearly doubled their annual
premiums. The article cited one couple
whose premium jumped 90% to $4831 per year.
The dilemma for couples like that is that they must either pony up the
money so they continue to have protection or else stop paying and receive no
benefits for all the premiums they’ve already paid. Tough choice.
So let’s apply the tool above to help you determine whether
long-term care insurance is a smart purchase for you.
Consider first the cost of this hazard. For a year spent in a nursing home I’ve heard
cost estimates of $35,000 to $120,000. The
national average is about $83,000 annually.
Unless you have a few million dollars in the stock market, I’d classify
this as “high cost” and thus belonging in the top half of the grid above.
How about the probability of the hazard occurring? The Wall
Street Journal article showed a graphic on that. For U.S.
Will never
need it: 48%
Will need
less than two years: 27%
Will need
from two to less than five years: 12%
Will need
five years of more: 14%
(Rounding causes the numbers to equal more than 100%.)
Put another way, there’s a 52% chance a 65-year-old will need
such care. If there were a 52% chance
your house would burn down, I think you’d classify that as “high
probability”. I would put this in the
same category—which means it falls into the upper-right quadrant of our grid,
“high cost/high probability”, an area where insurance is “likely not
available”. Yet it is. But for how long and how reliably?
In the face of the
high cost of nursing home care, many insurance companies have stopped selling
long-term care insurance. The same
article stated that at one time more than 100 companies offered this
coverage. Now it’s more like “a dozen or
so”. Will there eventually be none?
We will consider that question and others next week when I offer my thoughts on whether it’s appropriate
or wise to purchase long-term care insurance.
Until next time,
Roger
“Suppose one of you
wants to build a tower. What is the
first thing you will do? Won’t you sit
down and figure out how much it will cost and if you have enough money to pay
for it?” Luke 14:28 CEV
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