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04 - Is Long Term Care Part of Your Retirement Plan?


The growing need for long-term care is brewing into a major financial crisis for millions of older Americans who aren’t prepared for its steep costs. With 7 in 10 adults over 65 needing long-term care at some point in their lives, it close to inevitability; yet, two-thirds of people age 45 to 64 don’t think it will be an issue for them. More troubling, a third of adults age 55 to 64 think that their long-term care needs will be addressed through Medicare, which offers very limited protection. As a result of this lack of awareness or understanding, less than 15% of adults enter retirement with a plan to effectively deal with the costs of long-term care.1


The Cost of Long-Term Care 

According to Genworth, a leading long-term care insurance provider, the median rate for a semi-private room in a nursing home is $230 a day, or $82,000 a year.2 With the average stay in a nursing home nearing three years, that can amount to a quarter of a million dollars. This amount doesn’t include the cost of the care at home, which typically precedes a nursing home stay. The cost of an assisted living facility or an hourly homecare giver is considerably less, but most people don’t have a choice in the type or level of care they need.  Nearly three-quarters of nursing home patients are admitted due to cognitive impairments, such as dementia or Alzheimer’s.3

Most people try to avoid the long-term care discussion because the thought of spending any time in a nursing home is unpleasant; so they want to believe it won’t happen to them. However, any serious retirement plan should include a discussion of longevity risk in all of its forms. Most people fear the possibility of outliving their income; while the greater risk for many is the likelihood they will need some form of long-term care. The time to think about the risk of long-term care and plan for its eventuality is when you are young – in your late-fifties – with more options and more time to prepare. By taking the time now to explore your options, you can protect you and your family from severe hardship later.


The Long-Term Care Default Option

Whether or not you plan for long-term care, you have a default option. If you do nothing to plan for long-term care and you are forced to spend down your assets to cover nursing home costs, you could become eligible for Medicaid. Most people know Medicaid as a federal welfare program that provides financial assistance to low-income people in the form of low-cost health insurance. They provide similar assistance to pay for the cost of a nursing home stay. The main requirement is that the total value of your assets, not including your car or you home, cannot exceed $2,000.4  If you do qualify for Medicaid assistance, you would only be able to receive care in a state-designated nursing home, which may not be of a quality or in a location you desire. 

Medicaid is the best option for people who don’t have the means to pay for care or the premiums to purchase long-term care insurance. However, for people who do have the ability to save sufficient capital or the ability to pay the premiums for long-term care insurance, it could be the worst consequence of not planning ahead.


Your Options are Limited

You only have two options to prepare for long-term care expenses – accumulate $200,000 to $400,000 or more of cash reserves or buy long-term care insurance. The amount you need to accumulate or the amount of insurance you need to buy depends on a number of factors, including where you live, they type of care you want to plan for, and how long you would expect to receive care. Also, because the cost of long-term care increase every year, you have to account for inflation.

You can make certain planning assumptions, such as which spouse might require care first and whether he or she can receive care at home with the help of family caregivers, or the possibility of moving to a less expensive community. When you are talking about the possibility of spending several hundred thousand dollars, anything you can do to reduce costs can reduce the amount of upfront savings or insurance needed. You will then need to determine whether it is more preferable - to accumulate an extra $300,000 for care or spending $2,000 to $4,000 per person per year for insurance premiums.


The Medicare Misconception

Very simply, Medicare DOES NOT cover long-term care. Medicare is a government-run health care program for people 65 and older that provides a minimal amount of coverage for skilled nursing care. Medicare covers the full cost of skilled nursing care for 20 days only after a hospital stay of at least three days. It will then pay for up to 100 days of coverage after a daily deductible. After that, you are on your own.


The Long-Term Care Insurance Solution

Since its introduction four decades ago, long-term care insurance has gone through several iterations largely due to the rapidly evolving state of long-term care and its costs. Most insurance companies underestimated the rapidly escalating costs of long-term care and, over time, have had to reduce benefits and increase premiums. Many insurers left the market. They have also tightened their underwriting, making it more difficult to qualify for coverage. Still, for younger and healthier adults approaching retirement, long-term care insurance may be the most efficient way to protect their assets in the future.

Long-term care insurance is not inexpensive, but it much less expensive to buy it at a younger age. A typical long-term care policy covering a 55-year old couple costs about $5,000 annually.5 The policy pays a maximum daily benefit of $200 which is linked to a 3% compound inflation rider.6  That is a hefty outlay for a couple trying to maximize their retirement savings. For many people, long-term care insurance should be thought of one prong of multi-pronged strategy to cover long-term care expenses. Efforts to increase savings or reduce lifestyle expenses can form the foundation of the strategy with long-term care insurance filling in the gaps. This might allow you to purchase a policy with a smaller daily benefit and less inflation protection.

For example, a healthy 55-year old male would spend around $2,200 a year for a policy that pays a $150 daily benefit for three years. The policy includes a 5% compound inflation protection benefit. A policy with a 3% inflation protection benefit would cost around $1,300 a year. Increasing the elimination period from 90 days to 180 days (when you are paying for care out-of-pocket) can further reduce premium costs.5

Other ways to reduce the premium cost is to cut back on the benefit period. Most insurers have eliminated the life-time benefit option and have increased their rates for five- or six-year benefit periods. You can still cover most of the risk by choosing a shorter benefit period. A policy with a three-year benefit period costs around 30% less than one with a six-year period.

You can also find more policies offering a future purchase option. Instead of increasing benefits automatically, which is done on more expensive policies, this option allows you to increase the coverage every few years. That way, you can start out paying a lower premium and only increase it when you are able.


Strategies for Funding Long-Term Care Insurance

If the cost of long-term care coverage is prohibitively expense for a couple, but they can consider alternative strategies. For example, they could consider just insuring the younger or healthier spouse because she will most likely be the caregiver for the older or less healthy spouse and may not have anyone around to provide care for her.

If you have a cash-value life insurance policy or a deferred annuity, you can pay for premiums through tax-free rollovers. If your policy pays dividends, you can apply those to long-term care premiums as well.

A health savings account (HSA) can also be the source of tax-free money to pay for long-term care premiums. The amount you can use from an HSA depends on your age -- $1,530 for ages 50 to 60; $4,090 for ages 60 to 70; and $5,110 for ages 70 and older.6


Alternative Insurance Solutions

Another way to fund long-term care insurance is through hybrid or linked-benefit insurance products. One of the fastest growing product lines is hybrid life insurance, which gives the policy owner access to a large portion of the death benefit to pay for long-term care services. Any part of the death benefit not used to cover long-term care expenses is available to the beneficiaries upon the death of the policy owner.

Another insurance-based product now being linked to long-term care benefits are deferred annuities with long-term care riders. You invest in an annuity as if you were saving for long-term care expenses; but the annuity will pay out a fixed income at a higher rate, sometimes double or triple the rate, if it is needed for long-term care. Both the hybrid life insurance and annuity products counter the concern many people have with long-term care insurance, which is use it or lose it. These products offer significant benefits even if long-term care is not needed.


Time is Your Most Valuable Asset When Planning for Long-Term Care

No one can predict the future, but with a 70% chance of needing long-term care, the future cannot be ignored. There is no getting around the staggering cost of long-term care, but there are ways to mitigate the financial impact it can have. Whether the best solution is to accumulate the extra capital to cover the cost or transfer the risk to an insurance company, or some combination of the two, the most valuable asset we have is time.

Long-term care insurance is not for everybody and not everybody can qualify for it. What we do know is it gets more expensive with each passing year. The best use of your time right now is to have a serious discussion about addressing the inevitability of long-term care and finding the best solution to pay for it.

1Funding Long-Term Care Without Breaking the Bank. CNBC.com, March 13, 2016

http://www.cnbc.com/2016/03/13/finding-long-term-care-without-breaking-the-bank.html

2Americans estimates of Long-Term Care Costs are Wildly Off. Forbes. May 10, 2016

https://www.forbes.com/sites/nextavenue/2016/05/10/americans-estimates-of-long-term-care-costs-are-wildly-off/#59b179675180

3Aging and Health A to Z. HealthinAging.org, March 2012

http://www.healthinaging.org/aging-and-health-a-to-z/topic:nursing-homes/

4Spending Down Assets to Qualify for Medicaid. ElderLawAnswers.com, Jan 10, 2015

https://www.elderlawanswers.com/spending-down-assets-to-qualify-for-medicaid-12003

5Options for Covering Long-Term Care Costs. Kiplinger.com,

http://www.kiplinger.com/article/retirement/T036-C000-S004-options-for-covering-long-term-care-costs.html

6Use Your HSA to Pay for Long Term Care Insurance. LTCConsumer.com, April 5, 2017

https://ltcconsumer.com/dont-forget-use-hsa-pay-long-term-care-insurance/