After working for 20 years in the financial industry, one of the most problematic areas for retirement plans is a lack of long-term care protection. Many people don’t like to think that they will need it, but roughly 70% of 65-year-old people will need it at some point. A long-term care insurance policy helps cover the costs when you have a chronic medical condition, disability or disorder such as Alzheimer’s disease. This doesn’t mean you necessarily have to go to a nursing home, as often this care can be provided at your home, or a variety of other places. Careful consideration of long-term care costs is an essential part of any long-range financial plan, particularly in your 50s and beyond. You can’t afford to wait to buy coverage because you won’t qualify for LTC insurance if you have debilitating condition, and LTC insurance carriers won’t approve most applicants older than 75. The time to buy is in your 50’s and 60’s.
At least half of U.S. adults have one or more chronic health condition. As we age, annual long-term care probabilities increase. Long-term care helps with basic personal tasks of everyday life, sometimes called “activities of daily living.” This includes things like dressing, bathing and using the bathroom. LTC can also include adult day health care, home-delivered meals, home and community-based services and other things. You can get long-term care at home, in the community, and in assisted living facilities, or even in a nursing home.
Due to inflation, the longer one lives, the greater their end-of-life LTC may cost. Women’s longevity is typically greater than men, and men tend to marry women two years younger than they are, so the cumulative survivorship gap may be even more. For example, a healthy 65-year-old woman’s probability of requiring LTC in a five-year attained age increment, is about 5.6% at age 70. This increases to 13.9% at age 75, 27.2% at 80, 43.9% at age 85, and 58.3% at age 90. Women typically need care for an average of 3.7 years, while men require it for 2.2 years.
The median cost of care in a semiprivate nursing home room is $94,900 per year, according to Genworth’s 2021 cost of care survey. The more money that you spend, generally the better-quality care you will get. If you have to rely on Medicaid, your choices are limited to the nursing homes that accept payments from the government program. As you can see from the image at the top of this email, a healthy 55-year-old male or female could expect spend $521,363 and $606,366, respectively, on retirement healthcare costs. The costs are a bit less if one has chronic conditions due to a shorter life expectancy. The reality is that Medicare and most health insurance are not going to cover a large percentage of long-term care costs. For a 52-year-old Detroit, Michigan woman with Type 2 Diabetes and a life expectancy of 80, including one year of nursing home care at end-of-life, the LTC cost is $401,048. For a healthy woman with a life expectancy of 89, the LTC cost would likely be around $570,817.
Insurance usually is for low probability high-cost events. LTC unfortunately, is a high probability high-cost event. To fund long-term care there are several options. The first option is to self-fund via your retirement investment funds. Clearly, this can be a riskier strategy as a lot depends on your ability to save and grow those assets, versus the uncertainty of what your actual long-term care costs will be. Oftentimes, family members have to retire early to care for other family members, which can create a bit of a financial doom loop.
Another potential funding strategy is selling your home and downsizing. This clearly becomes a big challenge if you don’t want to sell your home, or if it is a bad time to sell in the market. There are also many frictional costs to selling a house such a real estate commissions, taxes etc., plus it can take a very long time to close on a sale.
The third option is long-term care insurance. To buy a LTC policy, you will fill out an application and answer health-related questions. The insurer might request to see medical records and interview you by phone or in person. You choose the amount of coverage that you want, and the policies usually cap the amount paid out per day and the amount paid during your lifetime. Once you are approved and the policy is issued, you begin paying premiums. Under most policies, you’ll have to pay for long-term care services out of pocket for a certain amount of time, such as 30, 60 or 90 days, before the insurer starts reimbursing you for any care. This period is called the “elimination period.” Often there is a shared care option for couples when both spouses buy policies, which lets you share the total amount of coverage, so you can draw from each other’s pool if necessary.
Now there are also asset-based LTC policies, which are a nice alternative to the traditional insurance. These policies are generally attached to a life insurance policy or an annuity, where clients can use the LTC benefit if they need it or leave the death benefit or accumulated asset value as part of your legacy. There are pros and cons to any of the funding strategies, but the reality is that everyone needs some type of plan for LTC, and we are here to help!
If you have any questions about getting a LTC policy or creating a financial plan to deal with LTC costs, please don’t hesitate to give us a call!