09 Oct Long-Term Thinking
Ignoring long-term care coverage can derail your retirement savings … but there are options to keep you on track, in the form of hybrid and stand-alone policies.
Here’s a number that puts the future in sharp relief: According to the Department of Health and Human Services, an American who turns 65 today has almost a 70% chance of needing some type of long-term care in their remaining years. That’s not medical care, but help with everyday tasks like eating or bathing. Twenty percent of those 65-year-olds will need that long-term care for more than five years. Whether that care happens at home or in a care facility, it represents a fairly significant investment in time and attention, which means that very often it isn’t cheap. Costs can range from $50,000 to $200,000 per year. The average 65-year-old today will spend $138,000 in future long-term services.
Those services and supports can include home health care, nursing care, personal care, respite care, hospice care, adult day care, and medical equipment. The expense of covering them can be a key factor in your financial plan for retirement.
Some investors rely on retirement portfolios to “self-fund” the costs for services ranging from occasional home visits from a health aide up to more significant assisted living facilities. But there are other ways to cover those costs while still letting your nest egg work for you.
First, however, be aware that Medicare is not one of them. It won’t cover home health aides, nursing home care, or other long-term costs — only short-term care. Medicaid will give government support for long-term care, but only if you qualify based on an income and asset test. If you’re too well off for Medicaid, then you’ve got two other options besides using your personal savings: traditional, stand-alone long-term care insurance or a newer “hybrid” policy.
Traditional long-term insurance is not as easy to find as it once was. You typically (though not always) pay an annual premium for life, and you get to choose how much you’re covered for, how long the coverage will last, and how quickly you can receive benefits. Those companies that still offer this kind of coverage can sometimes increase premiums after you purchase a policy, so pay attention to the small print. Another potential caution: These kinds of policies average out to being more expensive the longer you wait to use them.
A hybrid account, on the other hand, combines long-term care coverage with another kind of insurance. One variety is a kind of life insurance that allows a policy holder to draw long-term care funds from the death benefit. Another is a kind of annuity providing long-term care insurance at a multiple of the initial investment amount. The investment account gains interest over time tax-free. If you get qualifying long-term care expenses, you’ll draw them from the value of the account and from a long-term care pool — and if you go over the value of the account, the pool will continue covering your costs, just like insurance. Note, however, that using annuities for insurance like this can trigger extra costs, so be aware of those when making one of these accounts as part of your portfolio.
How to Choose
A financial advisor can steer you toward the kind of plan that’s right for you. But here are a few guidelines for making your own selection, and for eliminating plans that won’t work for you.
Consider how much coverage you want. Nationally, the median costs for homemaker services came out to $4,957 per month, and home health aides to $5,148 per month in 2021. Try to estimate how much coverage you’ll likely need and for how long. Of course, make sure you don’t buy more coverage than you can afford. At the same time, make sure to take the “long term” part of the protection into account, meaning — consider adding inflation protection to cover increases in those median costs, and evaluate the company providing your coverage for its long-term prospects. The last thing you need is to find yourself suddenly ready to draw your benefits only to find the provider isn’t there to pay them out.
Think about when long-term policies usually kick in, and how long it will be before you’re likely to qualify. Usually, long-term policies only offer coverage once a policy holder needs help performing two “ADLs” or “Activities of Daily Living,” which cover things like eating, prepping food, bathing, and getting dressed. Payouts aren’t immediate at that point. Most policies typically have an “elimination” or “deductible” period you’ll have to wait through before you can start collecting benefits.
Most people only take a serious look at long-term coverage when they’re in their 50s or older. Purchasing a plan at that point typically does cost less than once you’re closer in age to the time when you’re likely to need it (for most of us, that’s in our 80s or 90s). Every year that you put off buying coverage, the same policy gets more expensive — and that’s not even considering the potential for developing a disqualifying medical condition.
It’s also worth looking at your living situation. If you’ve got a close-knit family with several care providers living under your own roof, you might be able to rely on long-term care the old-fashioned way, from the next generation. If it’s just you and a spouse, your long-term care needs might wind up becoming a financial burden for both of you. If you’re living on your own, or if you have a family history of medical conditions like heart disease, diabetes, dementia, or other hereditary disorders, long-term care might be even more of a necessity, potentially.
Every situation is different, and evaluating your possible needs can take time, research, and reflection. A financial advisor can often provide direct answers to complex questions, and can help make your strategy more sound before you make any investment decision.
Questions about your situation? We are here to help – contact us for more information.
This material is for informational purposes only. The information herein has been derived from sources believed to be accurate. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. 5995114RG_Oct25