By Nick Shea, MBA
It’s no secret that Americans are living longer and longer. A longer life expectancy brings more years with loved ones, however, it also increases the chances of needing long-term care. In fact, 70% of Americans will need some form of long-term care during their lifetime. But most people never plan for the inevitable (1) — and long-term healthcare is expensive. While you are still healthy, it’s wise to start a plan for long-term care along with your retirement plan. There are many options, so let’s go through some of the basics of long-term care to help you create a plan for your future. It’s also important to note that Medicare does not cover long term care costs.
The Truth About Long-Term Care Costs
Long-term care costs are so high that they could potentially wipe out the bulk of your retirement funds. On average nationally, it costs $280 per day or $8,517 per month for a private room in a long-term care facility. (1) To make matters worse, due to their longer life expectancy, women pay significantly more than men for long-term care. The average amount of time women require long-term care is 3.7 years (or around 44 months), adding up to $374,748 in expenses in today’s costs for that private room. (2) By comparison, men who need long-term care utilize it for an average of 2.2 years (or around 26 months). That projected expense equals $221,442.
And costs are only projected to increase. From 2019-2020, the median annual cost for home health aides rose over 4.5 percent. (3) By 2030, the average cost for long-term care services is expected to double. (4) 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 long term care facility 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. In addition, it is generally less expensive and easier to obtain long-term care insurance when you are healthier and younger.
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 Options
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. At CIM we work with a number of professionals and companies to help people navigate the process.
You can choose the level of insurance you want and select the daily benefit amount for care in a long term care facility. 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 New Hampshire will cost an average of $11,315 a month, and hiring a home health aide could set you back almost $70,000 for the year. In states such as Massachusetts this cost is even higher.
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.
2. Life Insurance With A Long-Term Care Rider (1)
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 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 recoup a portion or all of their premiums. This type of policy involves permanent life insurance which, of course, has higher premiums than term insurance. The long-term care rider further increases the premium cost.
3. Annuity (1) 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 for an additional cost. Since 2010, the IRS allows for the long-term care portion to be used tax-free. (1)
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, if you have not annuitized, 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 available from the annuity 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 your age or stage of life, it’s crucial to plan for long-term care. This important part of retirement could derail your savings if you neglect to properly plan and thoughtfully consider your options. We at Catalyst Investment Management hope this article has sparked some discussion with your family about your choices as you age and need care.
In addition to your loved ones, we would be honored to partner with you on your retirement journey and help you navigate the decision-making process. If you have any questions or concerns regarding your financial future, please schedule a call by reaching out to us at (617) 610-0587 or emailing firstname.lastname@example.org.
(6) Riders are available for an additional fee; some riders may not be available in all States.
(7) Fixed Annuities are long term insurance contracts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Nick Shea is founder and financial advisor at Catalyst Investment Management, an independent firm dedicated to providing personalized financial advice and planning. Over 40 years ago, Nick started reading The Wall Street Journal, building his own portfolios, and developing a passion for the financial world. He turned this interest into a career, working for many years at the former Dean Witter, now Morgan Stanley, and Charles Schwab, where he worked as an investment consultant, branch manager, and product developer. As a learning and development director, Nick created and delivered the branch management leadership program for the entire branch network. He has a bachelor’s degree in political science from Occidental College and an MBA from the University of Notre Dame. Nick specializes in serving entrepreneurs and helping retirees navigate through the complexities of the Medicare system. He is passionate about helping his clients mitigate the risks that can derail their financial goals. He is known for championing his clients’ dreams and striving to help them find the financial peace of mind they long for.
Nick is actively involved in his community, faithfully serving in the Greater Salem Rotary Club, the Knights of Columbus, and on the Windham Economic Development Committee. He is also an elected member of the Windham Zoning Board of Adjustment. When he’s not working or giving back, Nick loves to read, spend time with his family, research his family’s genealogy, and travel, both in the U.S. and abroad. To learn more about Nick, connect with him on LinkedIn.