Planning for retirement, buying Insurance or self-insure?

Long Term Care Insurance

Long Term Care Insurance

For younger people who are interested in planning for their old age, one of the big questions is how to deal with potential long term care requirements? It is entirely possible that you may require hospitalization or a home nurse when you are older and both of those prospects can be extremely expensive.

You can rely on long term care insurance, but there is always the risk that your claim may be denied. The other option is to self-insure, which involves building up a pool of funds over your lifetime to help cover those unexpected costs.

Some financial analysts suggest that instead of putting money into long-term-care premiums and you could invest the money in a low cost 60/40 balanced index fund, which creates that pool of funds for later in life.

Since insurance is all about calculating risk, what does this self-insured scenario look like? The chance that an individual who lives to 65 will need no long term care before dying is about one in three. One in five seniors will need long term care for five years or more, so that is the two ends of the spectrum.

Then you have to look at home health care costs versus nursing home care. A nursing home will cost between $70’000-90’000 per year while in home care is closer to $30’000. If you have a good relationship with your family, you would be more likely to have a good home environment to spend your old age in so that should also be considered.

A young person in their 30s can buy a long term policy for about $60 a month, which provides $200 per day in care costs. Now what would we end up with if we invested the $60 instead? A life long mutual fund that is split at 60/40 stocks to bonds would return anywhere between 6-8%. Yo will have about $220’000 in that account by the age 85. That amount of money could pay for perhaps 2-3 years of nursing home care or 7-8 years of in home care.

Additionally that $60 a month insurance premium would continue to rise in cost, so you would have to consider that the lump sum from investing the same amount in an investment account may be closer to $300’000. Some insurance companies also go broke! What happens when the Insurance company you have been investing in goes belly up before you receive your long term care, all of those premiums will be meaningless.

Additionally, your relatives get to keep any of the unused money from a long term health fund that you have set up. That might give them more incentive to keep you in their home instead of in an expensive nursing home. On first glance it seems that someone in their 30s would be best off building their own long term care fund.

However there are a few issues. You would have to continue adding to that account your entire life, without fail. What happens if you lose your job for a couple of years? You might be forced to dip into the fund and when it’s not building, risk is increasing. What if you decide to dip into it to pay for your children’s college? It takes discipline to save for decades.

Long term care costs could increase rapidly as well, so that fund may not cover much into the future. An insurance policy will adjust it’s payout total upwards as costs rise, but of course so will premiums. Insurance covers the cost of inflation, the self-insured person bares the cost of inflation against their savings.

There is also the small possibility that you will need longer term care, so what happens if you burn through your fund and have to rely upon your children? It could be very expensive for them and damage their future finances.

The last risk is that you may need long term care at a much younger age than expected. What if you have a serious illness that forces you to retire at age 50? You self-insured fund won’t be big enough yet to cover you for an extended period.

When all factors are considered, both self insurance and long term care insurance have negative and positive aspects. If you want to reduce risk, take a closer look at your finances, health, lifestyle and family. If you are well off financially, can commit to saving, and can see yourself living in a big house with loving children who can help care for you in your old age, there is less risk with self-insurance.

However if you think you won’t have the family network to help support you, or you are concerned about your health in old age, then insurance may be a better option. Either way it’s a difficult decision, but with some thought you can reduce risk and find the right solution for yourself.

Critical Illness Life Insurance

Critical Illness Insurance

Critical Illness Insurance

Your future is always uncertain and you never know what might await you tomorrow or next week.  That’s one of the reasons that people purchase insurance in the first place – to provide some financial certainty in the case of an unexpected and unfortunate event popping up.  This is especially true of health insurance and critical illness life insurance in particular – the financial certainty could be the difference between life and death!

Critical illness insurance is designed to help with your finances in the event of a critical illness like a heart attack or lung cancer.  There are about 30 to 40 illnesses covered by these kinds of policies, everything from major organ failure to cancer, to heart bypasses.  Once you find yourself afflicted with one of these major illnesses you will receive a lump sum cash payment from the critical illness insurance policy.  You can use that money however you please, with most people using it to pay for their medical bills, but you can also use it to pay off debt so your family is in good shape should events turn for the worse and you pass away.

To obtain this insurance you need to be between the ages of 17 and 70.  It’s a useful type of policy because coverage is usually cheaper than standard health insurance as it covers a specific set of illnesses, but the money can be used for anything you want.
Choosing the right policy is usually straight forward, but you should compare insurance premiums and the number of illnesses covered by the policy.  It is best to find a policy that has all of the common illnesses covered – heart disease, cancer, stroke and so on.  Some policies will also settle earlier than others, with many policies not paying out in the early stages of the disease.  A number of policies will pay a set amount in the early stages of the disease, so if you have just been diagnosed with lung cancer, you receive 10% of the payment and if the cancer progresses you receive the other 90%.

The cheaper plans tend to have more restrictions on when payouts occur but many are still worth obtaining because they will pay out when it’s needed most.  It is crucial to get into the fine detail of the policy and determine the payout conditions and percentages as well as the actual illnesses covered.

This kind of insurance is becoming more popular because the payout can be used for anything, with some people using it to pay simple living expenses when they are ill and using their health care policy to cover the actual medical costs.  It’s a fantastic supplemental policy because if there are any issues with the health insurance policy you have, you can depend on the critical illness plan to cover you.

It’s one of those policies that is fairly cheap and easy to obtain but the benefit is significant if you fall ill to one of these common illnesses.