Health matters, including long-term care, can cost hundreds of thousands of dollars in retirement. When the average American retires with $172,000, most retirement nest eggs just won’t come close to meeting those bills.
This means that, regardless of how you decide to deal with the risk of long-term care costs, you need to have a plan. A well-designed plan will address the family issues as well as the economic issues.
In my last post I discussed how challenging the family dynamics can be when a family member is in need of extended care. To partner with that, this article will focus on the realities of the economics of long-term care. This is not intended to introduce fear into the discussion, but to provide clarity as to the challenge and how important it is to have a plan.
Important Facts About Long-Term Care
Most people believe that even if they need care, it probably won’t be for long. Long-term care doesn’t just mean a nursing home. It can take different forms such as home health care or an assisted living facility. You should work on the assumption that you will need long-term care at some stage in your life..
Consider these important facts about long-term care:
- 65-70% of those over age 65 will need some amount of care before they die.
- 20% of those receiving care will need it for longer than 5 years.
- The average annual cost in a private nursing room approaches $100,000. Memory care costs are often in excess of $120,000 per year.
- Surveys indicate the average lifetime dollar cost of care is between $200,000 and $300,000 per person.
- The average stay in a skilled nursing or assisted living facility is 2 to 3 years.
- The average stay in a memory care facility is 8-10 years.
- 75-80% of care is performed in the home rather than in an institutional setting.
- Interestingly, 40% of claims are for people under age 65, so the issue is not just “old age.
How to Pay for Long-Term Care Costs
First, you need to understand your current financial position. How ready are you for retirement? Can your assets support your spending and goals? What resources do you have available to fund additional expenses, like long-term care?
Revisiting the first blog post in this series, what is your plan for long-term care? Which family members would be able to physically support and care for you? Do you want to receive care at home for as long as possible, or are you willing to go to a group setting? How much do each of these options cost?
Then, stress test your plan. Would your resources likely support the average cost of $200,000-$300,000 if needed? Would they support a higher cost and longer need, like memory care?
There are essentially three outcomes:
- You have sufficient assets to cover your and your spouse’s possible long-term care needs in retirement without impacting lifestyle or legacy goals, and you do not necessarily need long-term care insurance. You might still purchase it for additional peace of mind.
- Your financial position is such that the cost of insurance premiums itself might not be worth the potential benefit. Your plan would be to spend down assets if long-term care was needed, and rely on Medicaid once assets are exhausted.
- The middle group who can afford the insurance and whose retirement plan would be significantly impacted by custodial care costs are the most effective use of insurance.
Don’t Rely on Medicare for Long-Term Care Costs
The first important point that is often misunderstood is that Medicare does not pay for long-term care that is custodial in nature. Medicare does help with some medical costs, but there can be confusion as to what these are.
Medicare will partially cover up to 100 days of services at home or in a skilled nursing facility, but only after a hospital stay of at least three days, and only if you need necessary daily medical attention. A good example of such care would be the care required after a hip replacement.
On the other hand, those who need long-term custodial care, assistance with daily living activities such as bathing, eating, etc., are out of luck. Medicare does not cover long-term custodial care.
The other government program, Medicaid, will cover long-term care but to use it, you first must deplete your personal wealth to qualify.
Medicaid is designed to cover individuals who have low income and few assets. Unlike Medicare, however, Medicaid pays for long-term custodial care services provided in nursing facilities that are licensed and certified as Medicaid nursing facilities.
To qualify for Medicaid, you need to meet income and asset requirements. Obviously, your choices are limited, and the level of care, while adequate, may not be what most people would prefer.
Understanding Your Long-Term Care Plan Options
Here are different options to consider in your long-term care plan:
As mentioned above, only Medicaid will help but only after you have largely depleted your assets. This should be seen as a last resort when other financial options are simply not available. Medicaid also rarely covers in-home care or assisted living facilities, while insurance policies typically do.
There is no magic number that helps you avoid long-term care insurance in favor of self-insuring instead. It depends on your total assets, age, debt, retirement expenses, health, and what you want to leave your heirs. Since the overwhelming majority of people do not purchase long-term care, they choose to self-insure. Right or wrong, at a certain age there is no turning back. If you are planning to pay for long-term care costs from your personal assets, there are some pros and cons to consider:
- Advantages: If you have adequate assets and are comfortable with them being used for this purpose, this approach may fit.
- Disadvantages: The amount of resources needed is uncertain. How much do you need to reserve for this risk? Is there a wiser way to cover the risk of truly extended care?
Traditional Long-Term Care Insurance
The earlier you purchase long-term care, the lower the premium. You don’t have to buy the best top-of-the-line policy. Review what you can afford. Long-term care policies come in many shapes and sizes. These policies generally do not have guaranteed premium rates.
It typically makes sense to start looking at long-term care insurance options around age 55, but that will vary by your individual goals, needs, and resources. Traditional long-term care insurance premiums are tax deductible if you itemize your deductions.
Many companies sell a product similar to car insurance – you pay a premium each year and, if you have a claim, you receive a benefit. If you never have a claim, the money is gone, having provided protection for the period of the policy.
Historically, most companies have had to raise premiums on existing policies due to low interest rates and high cost of claims. Most policies have a limited pool of dollars available for use for care needs. Once the pool is used the policy ends.
Hybrid Long-Term Care Policies
There are policies now available formed on a life insurance chassis to stabilize the pricing, and usually the price is guaranteed. The life insurance component also provides a return of some or all of the cost if you die without needing the care benefits.
Lifetime care benefits are available in some hybrid policies. These lifetime benefits reduce the “tail risk” of a very expensive long-term care need, like an 8-10 year stay in memory care that could cost upwards of $1 million in today’s dollars over an individual’s lifetime.
Additional Options to Consider
Health Savings Accounts (HSAs) can be used to pay long-term care insurance premiums but not long-term care custodial costs.
A cost of living benefit can be added that increases the benefit amount each year, which helps protect against inflation.
Long-Term Care is Essential to Your Financial Plan
You’re raising a family, saving for retirement, protecting yourself with life insurance and disability insurance – there’s only so much money to go around. Long-term care seems so far away that it’s easy to put it on the back burner.
But long-term care planning really is a crucial part of your financial plan. It’s an unfortunate fact that most of us will require daily care in some way, shape, or form. Preparing for the cost, preserving your savings, and saving your loved ones from the burden of care are our goals.
If you’d like to discuss your options for long-term care and whether a long-term care insurance policy may make sense within the context of your financial plan, we’d love to hear from you. Please do get in touch, and ensure you and your loved ones are well protected for any future long-term care needs.
This post was co-written with Steve Briggs, Founder of Petra Life Services