How to plan for long-term care needs health insurance doesn’t cover.
No one wants to imagine a time when they might need help performing basic tasks, but nearly 70% of people 65 and over will require long-term care at some point. Twenty percent will need it for five years or more.
In 1935 – the year Social Security was introduced – the average 65-year-old was expected to live another 12 to 15 years. Today, one in four 65-year-olds live past age 90.
As baby boomers and subsequent generations plan for their retirement years, it’s important to understand how living a long life can affect their financial outlook.
Health insurance – whether it’s through a private company or Medicare – does not cover long-term care. It only covers acute care associated with short-term illnesses and injuries.
Long-term care refers to the services and support that aren’t covered by health insurance. These include activities of daily living (ADLs) such as bathing, dressing, eating, getting in and out of chairs or bed and toileting. They can take place at home, in a residential facility, or out in the community.
The cost of long-term care can quickly cut into your retirement savings, especially if you and your spouse both require it. In 2023, the average annual cost for care in an assisted living community was $64,200 while a private room in a full-time skilled nursing care facility can cost more than $115,000 per year.
Medicaid does help with long-term care costs, but only people of extremely low means are eligible. That’s why it’s important to have a plan in place for funding this type of assistance should you need it. Long-term care insurance can help you cover the costs so you can preserve your assets and ensure you receive a high standard of care.
Long-term care (LTC) insurance covers – in whole or in part – a wide range of services, from cooking and light housecleaning to 24/7 nursing care. Just like with home or auto insurance, you pay monthly premiums, and in the event you need long-term care, you can draw from that policy. But unlike home or auto insurance, long-term care policies pay a per-day benefit.
The earlier you purchase a long-term care insurance policy, the longer you are likely to pay premiums before you need to use it. However, it’s important to note that rates significantly increase as you get older, as does the likelihood of being turned down. Your mid-50s are considered the “sweet spot” for buying long-term care insurance at a lower rate.
Three more factors can affect the cost of your policy: the daily benefit amount, the benefit period and the waiting (or elimination) period.
To select a benefit period, you could estimate how long you’ll require long-term care. As an alternative, you could buy a policy with a lifetime benefit period to eliminate the possibility of coverage running out (though they are considerably more expensive). And policies with a shorter waiting (or elimination) period will cost less than those with a longer elimination period.
While LTC premiums can be high, it’s important to understand the costs of care can extend beyond monetary demands and can put significant strain on you, your caregiver(s) and your extended family.
One potential drawback of long-term care insurance is that if you stop paying premiums before you need it, you may lose the coverage. In effect, the insurance company retains and invests your money to pay for other people’s claims and earn profits. There are alternatives, however.
For example, you could purchase a universal life insurance policy with a long-term care rider. This way, if you need long-term care, the policy will help cover the cost with part of the life-insurance amount (but note that this will reduce the death benefit your beneficiaries receive). If you never make a long-term care claim, the entire amount will go to your beneficiaries tax-free.
Another option is an asset-based long-term care contract, which uses the structure of either life insurance or annuities and provides additional benefits beyond long-term care coverage.
Asset-based long-term care life insurance includes a cash value component that can grow over time. If you require long-term care, the cash value can help you pay for it. If you don’t, it can supplement retirement income or serve as a tax-free inheritance to your loved ones. With this type of policy, you may also receive a surrender value if you decide you no longer want it.
Asset-based long-term care annuities allow the initial premium to grow tax-deferred until you need the benefit. Withdrawals made for long-term care purposes come out tax-free.
Historically, asset-based long-term policies were purchased with single premiums, but today there are multiple payment options.
One more feature to consider is an inflation rider. Nearly half of all people living in nursing homes are 85 or older. If you buy your policy at 65, by the time you’re 85, the cost of care may have risen considerably. An inflation rider increases your coverage over time, so your daily benefit amount keeps up with rising costs.
You might also inquire about a nonforfeiture rider, which will continue to provide coverage – although with reduced benefits – even if you stop paying premiums.
While these conversations can be uncomfortable, it’s essential to start a dialogue with your loved ones about your health, plans and goals. Long-term care doesn’t just affect the person receiving it, but the entire family – both financially and emotionally.
Reach out to your advisor to discuss whether long-term care insurance is right for you.
Sources: Longtermcare.gov, ssa.gov, HealthinAging.org
Insurance offered through Raymond James Insurance Group, an affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. 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.
