Your Options for Funding Long-Term Care Expenses

According to the U.S. Department of Health and Human Services, someone celebrating a 65th birthday today has an almost 70% chance of needing some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men, and an estimated 20% of today’s 65 year olds will require care for longer than 5 years.

Based on this data, long-term care expenses will likely impact your retirement plan—so you’ll need to plan accordingly. In this post, we’ll provide you with various options to help cover your long-term care expenses.

An overview of long-term care

Long-term care (LTC) is defined as help you may need with “activities of daily living” (or ADLs) due to injury, health, or cognitive impairment such as dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed). Most long-term care policies will reimburse you if you cannot perform or need substantial assistance in performing at least two of these activities.

Your long-term care options

The question you need to answer before deciding on an option involves your tolerance for risk. If you’re risk-averse, taking out an insurance policy to protect you in case you require long-term care is your best option. Alternatively, you can roll the dice and hope either you don’t need this or have enough of a buffer in your retirement savings to cover the costs of long-term care. Either way, you need a plan to address these potential expenses.

Purchase a long-term care policy
Long-term care insurance is expensive, and costs vary widely per the amount of coverage and LTC carriers. For example, a recent American Association for Long-Term Care Insurance (AALTCI) study reports the average annual cost for a 55-year-old male is $2,220 (for a policy covering $165,000 in benefits with a 3% growth rate to account for inflation). The same policy costs more for a 55-year-old woman ($3,700), as women tend to live longer than their male counterparts and thus file more frequent claims. Fast forward 10 years, and the annual price for the same policy increases to $3,135 (males) and $5,265 (females).

While everyone’s situation is different—especially if you have a family history of illness at a young age—experts recommend you obtain a policy in your mid-to-late fifties so you can lock in a lower premium.

While there are several reasons for this, the primary one is that you must qualify for long-term care insurance—meaning you must be healthy to buy coverage. Many people begin seeing a slight decline in health in their 50s, explaining why 24% of people ages 60-64 who submitted long-term care applications were denied in 2019. This number increased to almost 33% for those ages 65 to 69 and was significantly higher for those 70 and older.

Another reason to buy a policy when you’re younger is that long-term care premiums are based on the age you apply. That said, you don’t want to do so too early since people 70 or older file more than 95% of long-term insurance claims. In other words, if you buy a policy in your 40s, you’ll likely pay premiums for more than two decades before you ever file a claim.

Buy a hybrid insurance policy3
One alternative to standalone long-term care policies is adding a long-term care rider to your life insurance policy (sometimes referred to as a “hybrid long-term care policy”). These riders—offered on most permanent and some term policies at the time of application—allow you to access a portion of the policy’s death benefit every month to pay for your long-term care expenses. Hybrid policies are also more popular than traditional long-term care policies: out of the 350,000 Americans who purchased long-term care protection in 2019, 84% added a hybrid policy.

One big advantage an LTC rider has over a standalone LTC policy is that if you don’t use the care benefit, the policy still pays the death benefit—whereas standalone policies can feel like you’re wasting money if you never file a claim. Premiums on hybrid policies also remain fixed while a standalone policy is subject to premium increases.

Nevertheless, if your top concern is long-term care, you’ll often get more coverage for your money with a standalone long-term care policy. Additionally, according to Insurance.com, a hybrid policy generally costs 5% to 15% more than a standalone policy—depending on the company you choose. Finally, unlike qualified standalone policies, premiums on hybrid products aren’t tax-deductible.

Another type of hybrid product is a long-term care annuity. An annuity is a type of insurance product that provides investors with a guaranteed stream of income. You pay money up front (in a lump sum or series of payments), which is then invested and later paid out at an agreed-upon time, in an agreed-upon amount and timeframe.

With a long-term care annuity, any gains from your investment are received tax-free: provided they are used for long-term care expenses. While long-term care annuities often have simpler underwriting requirements than other insurance products, you’ll need to front a large sum of money to buy an annuity.

Self-funding long-term care
While we can’t tell you exactly how much money you’ll need to self-fund long-term care, we can share various costs to better help you plan. For example, according to Genworth, 2021 national monthly median costs are as follows (with 2020 costs noted in parenthesis):

Home health aide: $5,148 ($4,576)

Adult daycare: $1,690 ($1,603)

Assisted living facility: $4,500 ($4,300)

Nursing home, private room: $9,034 ($8,821)

Nursing home, semi-private room: $7,908 ($7,756)

Therefore, in assuming you’ll require two years of at-home care and one year in a semi-private nursing home, you’d need to shell out over $156,000 to cover a home health aide for one year and a one-year stay in a semi-private room nursing home.

You should also remember that these are current averages and, of course, costs will increase as the years march on. For example, in 2004, the median annual cost of a home health aide was $42,168. In 2021, this figure jumped to $61,776. As the U.S. has a rapidly aging population, this will only help further ignite inflationary pressures as they relate to long-term care.

Qualifying for Medicaid
Medicaid is a government program that provides health coverage to millions of people with low incomes and/or disabilities. While Medicaid rules and eligibility requirements vary by state, the program sometimes covers many long-term care expenses: including room and board in nursing home facilities. Some states even allow assistance with activities of daily living in the comfort of your own home.

However, as Medicaid qualification requirements include asset limits, you’ll need to fall below your state’s threshold—typically for a minimum of five years—before you apply (known as the “look-back period”). Even if you qualify for Medicaid, know that you won’t have access to options or benefits that accompany other long-term care options (e.g., limitless facility choices, as you’re required to seek care only from those that accept Medicare program payments). What’s more, in most states, you won’t receive coverage for assisted living facilities.

Other long-term care considerations
First up? The elimination period: the period in which you’ll need to pay for long-term care services out of pocket before the insurer begins reimbursing you. In general, the shorter the elimination period, the more expensive the policy. Common elimination periods are 30, 60, and 90 days, but some policies instead dictate a timeframe reflecting consecutive days of disability rather than a set time period.

Your daily benefit amount is the daily dollar amount you’re entitled to as soon as the policy is triggered. Choosing the right daily benefit level is a balancing act between obtaining an affordable premium and adequate protection.

Your benefit period is the total amount of time—often two, three, five, or unlimited years—the insurance company will pay benefits. Some policies offer a dollar lifetime benefit, which is the total maximum amount of dollars your policy will pay.

Inflation riders—also sometimes called “automatic benefit increase riders”—increase your daily benefits automatically every year. This is especially important since long-term care costs typically increase approximately 3-5% every year.

In sum: long-term care considerations

The National Association of Insurance Commissioners (NAIC) recently claimed that fewer than 1 in 30 Americans own an LTC policy—including only 7 percent of adults over 50 years of age. In fact, despite an aging population, the number of those insured (7.5 million) hasn’t budged at all since 2008.

These low coverage numbers are perhaps attributed to not only to the high cost of policies but also a significant percentage of people who wrongly believe they’re covered through employer-provided health insurance or government programs.

Regardless of your approach, planning for long-term care expenses is a must: especially if you want to alleviate the financial, physical, and emotional burden on your loved ones.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.