The Risks of Failing to Plan for Long-Term Care Costs

There's a high chance you'll need nursing-home care, yet many fail to plan.

ByABC News
July 1, 2014, 6:04 AM
Women have a 50 percent chance of needing nursing home insurance, yet many fail to plan for this expense.
Women have a 50 percent chance of needing nursing home insurance, yet many fail to plan for this expense.
Rick Gomez/Getty Images

-- You have planned for a comfortable retirement: where you want to live, how much you want to travel, how you would like to spend your days – and how you’re going to pay for it all. One thing that could derail this plan financially is your health. The related financial problem doesn’t stem from becoming sick and dying, but from becoming sick and living – and needing long-term care.

The financial risk that comes from this is greater for women than for men. Studies examining demographic data for all Americans – men and women – show that 30 to 50 percent of people who reach age 65 will eventually need long-term care in a nursing home. These studies have found that almost 50 percent of all women in the U.S. will need this care.

This means that women are more likely to end up draining their retirement nest eggs – or greatly reducing their estates – to pay for long-term care. Unbeknownst to many people, Medicare generally doesn’t cover this expense. In some parts of the country, long-term care with a private room can cost as much as $100,000 a year.

So you need a plan to pay for long-term care. One smart solution is to buy insurance to cover this cost, but many people fail to arrange this coverage.

This lapse is part of a larger personal financial issue: Research shows that people tend to make insurance decisions that aren’t in their best interests. Decisions about long-term care insurance are a prime example – for both women and men.

It’s important to understand the basic concepts of insurance and how to apply them to their situation, assessing costs versus risk.

Most people have fire insurance on their homes because their mortgages require it. But many of these people retain this coverage after their homes are paid off because they’ve grown accustomed to the peace of mind they get from knowing that, in the unlikely event of a fire, they will be covered against catastrophic financial loss. Yet, although most people are likely to need long-term care, many don’t get it. Many buy expensive extended warranties on their televisions, but they don’t make premium payments to protect their retirement assets from the drain of long-term care.

Insurance decisions hinge on your perception of risk — your risk tolerance — but in the case of long-term care, the odds are so great and the consequences of inaction so dire that this decision should be a foregone conclusion.

As with many types of necessary insurance, the primary goal of long-term coverage is to reduce your financial risk. If you buymore insurance than you need, involving higher costs, you may be defeating your financial purpose.

This concept applies to other types of insurance. If your car insurance policy has a low deductible, you’re paying much higher premiums than you would with a higher deductible. A higher deductible makes financial sense because the cost of a low one greatly increases costs.

Yet most people don’t feel that car insurance is unnecessary. This isn’t just because most states require auto liability insurance by law. People understand that it’s necessary to pay premiums to limit or eliminate their exposure to financial catastrophe from lawsuits stemming from negligence on the road. They grasp the concept that they are paying insurance companies to assume this risk on their behalf.