What’s Your Long-Term Care Plan?
By Bill Leavitt
There are a lot of things you don’t want to gamble with in life, like your retirement savings, how you raise your kids, or your health. Unfortunately, many Americans take one particular risk with their health, possibly without even realizing it, and that’s making a long-term care plan. (1) Since more than half of people turning 65 will need some form of long-term care during their lifetimes, it’s critical to have a plan to pay for these costs. (2)
When you are healthy and thriving, it’s easy to focus solely on building your savings to provide for your basic retirement expenses and forget about the potential need for long-term care as you age. But no matter what your health looks like today, creating a long-term care plan now will empower you to research your options and choose strategies that are the best fit for you.
How Much Will Long-Term Care Set Me Back?
Long-term care costs are so high that they could potentially wipe out a bulk of your retirement funds. On average nationally, it costs $275 per day or $8,365 per month for a private room in a nursing home. (3) To make matters worse, because of their longer life expectancy, women pay significantly more than men for long-term care. The average amount of time women require long-term care for is 3.7 years (or around 44 months), adding up to $368,060 in expenses in today’s costs for that private room. (4) For men, who need long-term care for an average of 2.2 years (or around 26 months), that equals $217,490.
And costs are only projected to increase. In the past five years, long-term care expenses have risen about 3%, with a big jump in prices from 2016-2017. (5) By 2028, the average cost is expected to increase to $5,376 per month for assisted living, (6) compared to $4,000 today. (7) These costs can vary based on the level of care and amenities needed, as well as the size of the room and the location, so your first step in making your own long-term care plan is to decide what type of care you prefer.
What’s Your Ideal Long-Term Care Situation?
If you have a family history or early signs of Alzheimer’s or dementia, or if you suffer from a chronic disease that will require ongoing care or daily assistance, look into facilities that offer the care you’ll need, and share your thoughts with your family. Would you prefer to live in a nursing home or would you like nurses and assistants to come to your residence? Do you want a religious community of care? There are several preferences to take into consideration when considering your long-term care plan.
Having the option to make these choices yourself lends much-needed autonomy to your long-term care plan. If you wait until you need it, you may not be in good enough health to make the decision, or the size of your savings might determine the care you receive. Whether you’re worried about potential health concerns or want to protect your hard-earned wealth, it’s important to understand the long-term care insurance options available to you and whether or not a policy makes sense for your lifestyle and needs. It also helps alleviate the burden on your kids if you have a plan in place.
Your Long-Term Care Plan
Long-term care coverage isn’t cheap, but it pales in comparison to long-term care costs. Here are some options to consider when creating your long-term care strategy.
1. Traditional Long-Term Care Insurance
With traditional long-term care insurance, you pay a premium in exchange for the ability to receive benefits if they are needed. If you need long-term care at some point, the policy provides you with money to pay for it. If you never need long-term care, then you receive no benefits. It’s a “use it or lose it” policy.
Just like any insurance policy, you will have some coverage choices to make.
You can choose the level of insurance you want and select the daily benefit amount for care in a nursing home. You can also add home-care coverage if that is a priority for you. In order to choose the right coverage amounts, you need to know what the cost of long-term care looks like in your state. For example, a private room at a nursing home in Connecticut will cost an average of $13,916 a month, and hiring a home health aide could set you back over $54,000 for the year.
Length Of Coverage
You must also decide on the length of time you want the benefits to be paid. Common options are one, two, three, or five years, or for your lifetime. Logically, the longer the benefit period, the higher the premiums you will need to pay.
Your policy will also indicate “benefit triggers,” or conditions which must exist in order to receive benefits from the insurance company. A tax-qualified plan only pays benefits once you are unable to perform two of six activities of daily living without substantial assistance for at least 90 days, or have a cognitive impairment like Alzheimer’s. Non-tax-qualified plans may have less restrictive benefit triggers.
Inflation And Premiums
If you want, you can have your benefits increase with inflation to match future care costs. It is also important to note that premiums can increase as they are not usually set in stone.
Connecticut Partnership For Long-Term Care
If you live in Connecticut, you have another option. Through the Connecticut Partnership for Long-Term Care, (8) you can purchase long-term care insurance through a private company that sells special long-term care policies. The policies under this program are different from regular long-term care policies because they offer Medicaid Asset Protection. While Medicaid will pay for care in a nursing home and some home care, you must be poor to qualify for it.
The partnership program helps you in two ways: saving money on long-term care insurance and giving you peace of mind that you will receive the care you need. When your insurance policy has paid all its required benefits, you can apply for Medicaid and the amount that your partnership insurance has paid will be disregarded in your Medicaid application, increasing your eligibility. That means that you may only need to purchase insurance in the amount of the assets you want to protect, which can be much less than a long-term policy. If you live in Connecticut, speak to your financial advisor about whether you should pursue this option.
2. Life Insurance With A Long-Term Care Rider
With a traditional long-term care policy, people sometimes feel that if they buy it and don’t use it, they have wasted their money. Because of this, several hybrid products have emerged. One very popular solution is a life insurance policy with a long-term care rider. This strategy is enticing because if long-term care is needed, the funds are available through your policy’s death benefit. If you don’t spend the total benefit available, your beneficiaries will receive the balance upon your death (tax-free), thus no wasted money.
If you need life insurance, getting your long-term care coverage as a rider may be a good option. This way, someone will be benefiting from the premiums you are paying, whether it is you or your heirs. Plus, because the policy accumulates cash, the insured individual can access it if needed, allowing them to to recoup a portion or all of their premiums.
3. Annuity With A Long-Term Care Rider
If you don’t need life insurance, another combination product may be better suited to your situation. If you purchase a fixed annuity, you may have the alternative of adding a long-term care rider onto the contract. Since 2010, the IRS allows for the long-term care portion to be used tax-free. (9)
After purchasing the annuity, you would select the amount of long-term care coverage you want, often two to three times the face value of the annuity, as well as the length of time you want coverage. Finally, you have to decide if you want inflation protection.
This option makes money available to you if you need long-term care. Otherwise, you can cash out the annuity when it matures (in which case you would lose your long-term care coverage) or let it accumulate and ultimately pass on the assets to your heirs.
Obtaining long-term care coverage through an annuity can be appealing because it is generally less expensive than stand-alone insurance and you can receive coverage without medical underwriting. Annuities tend to be less common than the other choices, though, because of the current low-interest rates and the large up-front investment.
4. Save On Your Own
Consider starting a savings plan specifically for future healthcare needs. One option is to create a separate, high-yield savings account and contribute a specific amount every month, building a contingency fund for whatever healthcare expenses come your way. If you end up not needing long-term care, the money is still yours and can be used for your living costs, unexpected expenses, or an inheritance for your heirs.
Start Planning Today
Regardless of where you are in life and the financial obstacles you face, the important thing is that you start planning for this aspect of retirement. We know that thinking about the need for long-term care can be deeply unsettling and confusing. That’s why our team at Bridgelight Financial Advisors is here to help by using our comprehensive financial planning services. If you have questions about your long-term care options and want to make sure you have the coverage you need, get in touch with us today by calling (203) 795-7080, emailing Advice@BridgelightAdvisors.com, or scheduling an appointment online!
Bill Leavitt is the president of Bridgelight Financial Advisors, an independent, privately owned financial advisory and financial planning firm. He specializes in working with pre-retirees, retirees, professionals, and women investors, helping them navigate a complicated and ever-changing investment landscape. With over 25 years of experience, Bill serves his clients using his own unique financial planning model, The Wealth Focus™ Process, where he helps clients develop their customized long-term wealth strategy in four comprehensive steps. A Connecticut native, Bill resides in southern Connecticut with his wife, Laura, and their three daughters. To learn more about Bill, connect with him on LinkedIn.