“You have more than enough money to pay for long term care if you ever need it, so don’t waste your money buying long term care insurance!!”
That is the advice that many financial advisors, CPAs, attorneys, and insurance agents give to their clients.
So, is it the right advice? Let’s find out.
Imagine that you have $3,000,000 in assets – your home, your 401k plan, your savings
and investments. Imagine further that you have no mortgage on your $1,000,000 home, and you start wondering why you should keep paying your homeowner policy premiums.
So you call up your financial planner, Peter, and say: “Peter, my home is paid up and I have enough money in the bank to build it back up on the remote chance it may burn down. Why don’t I cancel my homeowner’s policy and save myself some money?”
Peter says, “Don’t be irrational – anyone can give their money away and why would you want to take the risk that you could lose 33% of your assets?”
You say, “That makes sense.”
The next day you call Peter up again and say, “Peter, I have another great idea. I can save $1,600 a year by canceling my disability insurance policy – after all, on the remote chance that I become disabled I can start liquidating my 401k plan to pay for my living expenses.”
Peter says, “Self-insuring your health is one of the craziest things I have ever heard – and why would you want to take a risk that you could spend down all of your retirement plan assets on healthcare?”
You answer, “What was I thinking of? Thanks.”
A week later you call up Peter and say, “If I cancel my liability and E&O insurance, I can save $3,500 a year – after all, the chance that I will ever be sued for negligence is remote.”
Peter replies, “I’m tired of these stupid calls – You are either deranged or you are putting me on.”
You promise not to call Peter again with your cockamamie risk management ideas.
But … a month later an insurance salesperson tells you that the costs of long term care can run over a million dollars as the result of severe strokes and injuries, or from illnesses such as Parkinson’s, Multiple Sclerosis, and Alzheimer’s. He also tells you that according to the latest statistics, 70 out of 100 Americans reaching age 65 will need some kind of long term health care and 20 of them will need care for more than 5 years.
Even though you promised never to call Peter again, you decide to run this by him.
He says, “What now – please don’t tell me you want to cancel your life insurance!”
You say, “An insurance guy wants me to buy long term care insurance. Sounds like a smart thing to do because if I ever need extended health care, I will either have to pay the costs from income – and live on less – or pay them by liquidating my assets, which are earmarked for my family. In addition, the odds that I will need long term health care are far greater than my house burning down, becoming disabled, or being sued for negligence – but the premium is $5,000 a year, what do you think?
Peter says, “You would be foolish to buy that insurance – after all, you have more than enough money to pay for the care if you ever need it.”
You reply, “Thanks, I appreciate your consistent advice on how to avoid risk – and by the way, since you are recommending that I don’t buy the insurance, will you pay for my long term care if I ever need it?”
Peter says, “Now that you put it that way, long term care insurance might be something we should consider!”