How to prepare for the sticker shock of long-term care
Should you buy insurance or self-insure?
The good news is that the average life expectancy around the world has more than doubled since 1900 – approaching 70 years worldwide1 and 80 years for someone born in the U.S. today.2 In addition, the number of American centenarians continues to grow, increasing nearly 44% between 2000 and 2014.3
The not so good news: The longer we all live, the greater the possibility that we’ll spend our later years in need of ongoing care in our homes, at an assisted living residence, or in a skilled nursing facility.
The costs could be substantial
Statistics from the U.S. Administration on Aging suggest that 70% of us will need some kind of extended care in later years.4 If that care is provided in a nursing home for an acute condition, a good portion of the expense will likely be covered by Medicare. If not, the burden falls on you—and it could be substantial. For example:
- If you or a loved one has a chronic condition that requires ongoing assistance with the daily activities of living, such as Alzheimer’s (or another dementia), Parkinson’s, or Lou Gehrig’s disease (ALS), the median cost to live in a care unit is about $123 a day.5
- That puts the ballpark cost of care for five to 10 years at anywhere from $225,000 to $450,000, depending on where you live.
- This cost is in addition to what you’ll be paying for regular health care expenses such as Medicare premiums and copays, vision, over-the-counter medications and dentures, which will likely surpass the estimate from Fidelity Investments of $280,000 for a 65-year-old couple retiring this year.6
Several ways to pay
For individuals retiring at age 65 this year, Fidelity reported that men will need $133,000 to cover health care costs during retirement, while women will need $147,000 (primarily because they are expected to live longer). Adding these individual health care costs to the $450,000 needed to cover the possibility of long-term care, you could be facing a “sticker price” of close to $600,000 to cover health care costs in your later years.
That figure could double if you have a spouse who also needs care or you assume responsibility for an aging parent’s expenses.
Fortunately, there are several ways to pay for the long-term care costs you could encounter later in life, including:
- Medicare: This will cover many of the costs of care in a skilled nursing facility – but not the expenses of home care or residential care for patients in the early and mid-stages of Alzheimer’s or other debilitating conditions.
- Veteran’s benefits: If you have medical coverage as a Veteran, those benefits could cover some of your costs too.
- Medicaid: Administered at a state level, this benefit program will pay for acute care if you were to run out of money or assets.
- “Self-insuring”: This simply means designating your personal investments, a Health Savings Account (HSA) balance, or other savings to pay for the care.
- Long-term care (LTC) insurance: You pay for an insurance policy that agrees to pay a daily amount toward the cost of your care at home or in an approved facility over a certain period of time if your needs qualify.
- A life insurance or annuity rider: Extra endorsements (free or paid) can be added that allow you to use the contract’s cash value to pay for nursing home care or terminal illness.
Here’s a closer look at the last three options, which are the most likely sources of funds if you have sufficient assets.
‘Self-insure’ for flexibility in saving and spending
“We usually recommend that our clients self-insure for the cost of long-term care if they have more than $2 million in assets,” says Alyssa Do, Managing Director and Wealth Strategist, Boston Private. Self-insuring essentially means repositioning and segregating a large sum of cash in its own account and/or setting aside money regularly in a Health Savings Account (HSA) if you have one, to build its value with tax-deferral.
“Unlike purchasing a long-term care insurance policy to cover the potential costs, this option gives you more flexibility to put the money aside whenever you wish, without limits on how long you can use it or the daily amounts you can take out,” she explains. “It also means that if you don’t need the money for care expenses, it’s available for other uses.”
On the other hand, says Do, “You want to be sure that the assets you’ve designated for these future expenses are available and accessible when you need them in the future, and not tied up in an investment where liquidity would be a problem, such as real estate.”
A LTC policy leverages assets and transfers risk
When you purchase a long-term care (LTC) policy, you are essentially doing two things:
- Leveraging a smaller amount of assets now to create a greater benefit in the future
- Transferring the risk of loss to the LTC insurance company
Essentially a LTC insurance policy is a contract you purchase for a specified premium each month that agrees to cover the cost of care at home, at an adult day facility, in an assisted living unit, or in a nursing home for people age 65 and over who have a chronic or disabling condition that needs constant supervision.
Purchasing a LTC policy may be a good option if you have better uses for your money right now and don’t want to tie up assets by self-insuring. Because it requires a smaller outlay, the rest of your portfolio can continue to support your lifestyle or immediate business or financial goals.
If it is offered by your employer as a group benefit, the cost of a long-term care policy may be more affordable than if you purchase it individually. It also may include the services of a coordinator or “concierge” who can help you navigate the health care maze. There also are tax benefits because your premiums may be deductible and the proceeds you receive are tax-free.7
At the same time, the cost to purchase a LTC policy can be high, particularly if you purchase one at an older age. Premiums for LTC policies have been rising rapidly as insurance companies try to price the policies to meet the cost of claims, which they seriously underestimated when the first LTC policies were issued 30 or so years ago. Some insurers have gone out of business as a result. Others may limit the benefits they will pay or disqualify anyone with a pre-existing condition.
However, the bigger concern with a LTC policy is that it’s a “use it or lose it” proposition, says Do: If you don’t need the coverage, you can’t recover the premiums you’ve paid.
Other insured options
Another strategy that allows you to leverage your assets, but with more flexibility than a LTC policy, is to purchase a life insurance policy or annuity contract with a nursing home care or terminal illness rider. Adding the rider typically allows you to withdraw money from the policy after the first year to pay for long-term care costs without paying any penalties or fees for early withdrawals.
These so-called “linked benefit” or hybrid insurance products can be purchased with a single large premium as well, which makes them similar to a self-insuring option. They also have no limits on how long you can tap into the cash value or how much you can withdraw each time (until you’ve exhausted the cash value, of course). Like other insurance products, the proceeds are tax free and any leftover cash value at your death goes directly to your beneficiaries tax-free too.
Clearly, there are some advantages to using insurance as a way to cover future long-term care costs without tying up your cash. That’s why you might decide to take a “combo” approach, using an insurance policy to cover some costs for a reasonable outlay, then adding money to a self-insurance bucket to have on tap as well, says Do.
No right or wrong strategies
In the end, she says, there are no right or wrong answers to the question of how to cover your future long-term care expenses. “You’ll want to work with your advisor to explore your options and develop a personalized plan based on your individual circumstances,” Do concludes. As you do so, you’ll want to consider a host of other factors as well, such as:
- Your level of wealth and liquidity
- Your age (premiums are lower at younger ages)
- Your gender (women typically die later, spend more time in nursing homes)
- Your health (better health = living longer!)
- Your family history (inherited conditions could mean an extended stay in assisted living)
- Where you live (cost of care can vary widely from state to state)
- Whether you’re married or single (will you stay in your own place while your spouse is in assisted living?)
- Your desire to leave a bequest
- Your charitable intentions
Your Boston Private advisor can also help you estimate how much you (or you and your spouse) might need to set aside for care using one of the many online interactive calculators that estimates the cost of care in your state.
Even if you never have to implement your long-term care plan, simply having one in place and knowing where to find the money you might need in the future can provide peace of mind that you can pursue your current goals with energy and confidence.
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