How Long-Term Care Insurance Works
Let's face it, unless you are talking about certain wines or steak, aging isn't exactly a topic most of us relish thinking about. Visions of rocking chairs and bingo halls might conjure up images from a bygone era, but the reality is, we all get older. And while planning for retirement might seem like a distant concern, the potential need for long-term care (LTC) is something worth considering, no matter your age.
Admitting we might someday need help with daily tasks like bathing, dressing, or preparing meals can be uncomfortable. But here's the truth: 70% of people over 65 will require some form of LTC assistance. The associated costs can be staggering, reaching $40,000 per month for nursing home care alone1. These unforeseen expenses can quickly erode your hard-earned savings and leave your loved ones facing a significant financial burden.
Long-Term Care insurance offers a potential solution, but navigating its complexities can feel like wandering through a financial labyrinth. Policy terms, coverage details, and benefit structures can be confusing, leaving many people unsure where to begin.
Understanding Your Long-Term Care Options
So, what are the costs? Let’s pretend you’re 55 years old. In 20 years, and with 5% inflation (according to Genworth insurance):
| Location | In-home | Assisted Living | Nursing home |
|---|---|---|---|
| Bend, OR | $18.2k/month | $17.2k/month | $17.2k/month |
Keep in mind that location matters and so does level of care. Why assume 5% inflation? It’s usually higher than general inflation, and demand will far exceed supply over the next few decades…we’re an aging population so there will be – relatively speaking – fewer young people to care for more elderly people. As you can see, LTC costs can be significant, especially if they are measured in years or decades. They can have a significant impact on your retirement plan, particularly of a surviving spouse.
Notice how I mentioned that these were the costs per month? The length of stay is an important factor. How long is the average stay? For men it’s 2.5 years, but after the first year, closer to 4 years on average. For women it’s 3.8 years on average and if needed for more than a year, the average increases to 5.2 years. So, it follows…who pays more for LTC? Women.
Types of Long-Term Care Insurance:
There are three main types of LTC insurance:
- Traditional: This “pay as you go” type offers the highest benefit per premium dollar paid, but highest risk since premiums can be raised by the insurance carrier in future years. Many people are tempted to let these policies lapse due to unforeseen financial setbacks or premium increases. And these policies do not build equity, nor do they have a death benefit.
- Life Insurance with LTC Riders: This type combines life insurance coverage with an LTC benefit. The LTC benefit can be accessed if you need qualified care. These are optimized for other outcomes such as a death benefit — not necessarily the most effective coverage for LTC needs.
- Hybrid: This type offers a death benefit and a return of premium. The initial premium for this type of policy is typically higher than traditional LTC insurance. Hybrid is often seen as the “Goldilocks” choice, providing a nice balance of guaranteed, attractive benefit, return of premium (partial or 100%), and a death benefit component.
Premiums are most impacted by age, sex, policy features and current interest rates.
Who Should Consider LTC Insurance?
There is no one-size-fits-all answer to this question. However, LTC insurance may be a good option for you if you are:
- Age 50 or older: The earlier you purchase LTC insurance, the lower your premiums will be.
- In good health: There is an underwriting process which takes into the applicant’s health history and recent medications. Your good health is a mandatory ticket towards getting a policy.
- Have a family history of needing LTC: If you have a family history of needing LTC, you may be more likely to need it yourself.
- Want to protect your retirement savings: LTC insurance can help protect your retirement savings from being wiped out by LTC costs.
- Have sufficient confidence in your liquidity to meet the financial commitment of the premium(s): The powerful benefits of a LTC insurance policy do not come for free. This is why it is critical to design a policy that best fits your current and future balance sheet and income resources.
LTC insurance can help bridge the gap between your retirement income and the high cost of care. It can also empower you with more control over your care choices. However, it's important to understand that LTC insurance isn't the only solution.
The Importance of a Plan, Regardless of Insurance.
Recently, I had the opportunity to sit down with Jennifer Ellsworth, managing partner of Bend Senior Care Management. Jennifer's vast experience in senior care underscored a crucial point: regardless of whether LTC insurance is right for you, having a plan for your care is essential.
Jennifer's biggest takeaway? The power of open communication. Discussing your preferences and wishes with your family can alleviate potential future stress for everyone involved. This conversation, often referred to as "advance care planning," ensures your wishes are known and respected, empowering your loved ones to make informed decisions on your behalf.
Remember, LTC is a significant decision. Don't rush into it. Seek professional guidance to develop a well-rounded plan that addresses your long-term care needs while aligning with your overall financial goals. If you’re ready to build a financial plan and prepare for your future, my team and I are ready to help.
Stu Malakoff, CFP®, CDFA®, CPFA, CRPC® I President, Bend Wealth Advisors
CERTIFIED FINANCIAL PLANNER™
523 NW Colorado Ave. Ste. 100
Bend, OR 97703
Direct 541.306.4325 I Office 541.306.4324 I stu@bendwealth.com
Sources and Disclosures:
https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Stuart Malakoff and not necessarily those of Raymond James.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Guarantees are based on the claims paying ability of the issuing company. Long Term Care Insurance or Asset Based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59 ½, may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.
These policies have exclusions and/or limitations. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
