The Crippling Cost of Self-Insuring Long-Term Care

Planning for long-term care (LTC) services in retirement is a tough task because the future need for such services is somewhat unpredictable. And while the average retiree is living longer, the need for long-term care and support can arise without warning in later years.

If a retired person falls ill they often rely on long-term care, such as in-home nursing care or nursing home services. Without LTC insurance, the out-of-pocket expenses can rise quickly. Regardless of how large your retirement nest egg is, the threat of long-term care jeopardizes the wealth and assets of any retiree and their family. (For more, see: How to Avoid Common Middle-Class Money Traps.)

Why People Don't Buy LTC Insurance

Many individuals opt against purchasing LTC insurance after learning about the steep price tag. From an economic standpoint, it seems smarter to self-insure should an individual ever require long-term care. Many retirees might think, “It will never happen to me – I’ll never need long-term care because I’ll never get sick.” However, according to the U.S. Department of Health and Human Services, 70% of people turning 65 years old will need long-term care. For that 70%, covering the cost of long-term care without insurance can cut through retirement savings quickly. Life Happens reports eight hours of in-home care per day is valued at $44,000 a year, and nursing home care can cost retirees a sky high $84,000 a year.

With 70% of people needing LTC coverage, why aren’t people buying insurance protection? A study conducted by Dr. Olivia Mitchell and Dr. Daniel Gottlieb found that many individuals think of LTC insurance as an investment rather than financial protection. In an article for The Wall Street Journal, Mitchell and Gottlieb elaborate further, stating, “We found that many people regard long-term-care insurance as having no real value if ultimately the payouts aren’t needed. That is, instead of looking at long-term-care insurance primarily as financial protection, many people think of it as an investment – and a bad one at that.” (For more, see: How to Build Retirement Income with Annuities.)

After working for years and creating a thorough retirement plan, it’s the hope of many retirees to pass along wealth to their children or family. Health plays the role as the wild card, making LTC insurance a safeguard from unexpected expenses and unfortunate situations. According to the American Association for Long-Term Care Insurance, the average cost for insurance coverage for a couple at age 60 is $3,381 per year, with some plans costing as low as $2,794 and as high as $5,637.

For a lot of retirees LTC insurance costs more than expected, giving many the reason or justifiable excuse to “self-insure.” Rather than purchasing a plan, individuals assume they can cover expenses out-of-pocket if they ever need long-term care. Upfront, self-insuring plays out like the best option – there are no yearly premiums, and better yet, if an individual lives a healthy life free of long-term care expenses, no money is wasted in annual insurance premiums.

When choosing to self-insure, retirees can set money aside in a savings account for future care needs and forget about it. While this sounds like the perfect scenario, insurance is offered because not every scenario in life is perfect – it’s offered for the “if and when” situations that can happen at a moment’s notice.

Considerations for LTC Insurance

For those choosing to purchase LTC insurance to protect their assets, and more notably to protect their wealth for the next generation, there are some important things to understand about buying a long-term care insurance plan. Unfortunately, pre-existing conditions may disqualify individuals from certain plans. Nonetheless, every company is different, so even though a certain provider denies an application on the basis of liability, it’s possible to purchase similar coverage from a different company. (For related reading, see: How to Make Your Nest Egg Last.)

According to the Long-Term Care website administered by the Department of Health and Human Services, there are a few major items to consider when purchasing coverage:                                                                                       

  • Don’t buy too much or too little insurance.
  • A “one-size-fits-all” policy does not exist.
  • Insurance does not cover all long-term care expenses.
  • It costs less for younger individuals to buy coverage.
  • As income changes throughout retirement, make sure LTC insurance remains affordable for your future.

Government Assistance

People tend to assume the government will help cover the cost of long-term care needs, but in a majority of cases that assumption is incorrect. The Wall Street Journal reports, “Some people also may be assuming, incorrectly, that they will qualify for government assistance to help them pay for nursing-home care. Rules are in place to disqualify many who won’t meet the strict conditions required.”

The government only subsidizes long-term care through Medicaid if an individual or couple meets extremely low levels of wealth. The Long-Term Care Council reports, “In most states, an individual needing Medicaid nursing home care must have assets less than $2,000. Typically, a couple needing Medicaid nursing care must have assets less than $3,000.” Each state has different policies, but LTC coverage from the government is contingent on near poverty. For individuals without LTC insurance, prolonged care services can drain savings exponentially before qualifying for federal aid. (For more, see: Defined Contribution Health Plans: A Primer.)

Asset Protection and Life Insurance

For those concerned about exhausting their assets if a LTC plan runs low or the funds completely dry out, stop gaps are available. Partnership protection plans offer an advancement on medical expenses without having to worry about a lack of care because you’re tight on cash due to varying circumstances. Dependent upon personal preferences and benefit choices, asset protection can be included to ensure maximum coverage.

Utilizing your life insurance plan to help cover the costs of LTC insurance is another possibility. Term insurance would not work in a situation like this: you’ll either need a whole life or universal life insurance contract because some have provisions in them that you can use the death benefit to pay for LTC related expenses, with the balance to pass on to your beneficiaries. The one drawback with life insurance is that the partnership protections doesn’t apply. However, this strategy eliminates the risk of paying for something that might never be used. Even if you’re fortunate enough to never need LTC, you’ll never be able to elude death. Therefore, the monies spent on life insurance would eventually pass on to your beneficiaries upon death.

Yes, LTC insurance can be expensive. But regardless of how wealthy or how detailed a retirement plan is (including plans with savings for future care needs), if the objective of a retiree is to pass along assets through an estate, LTC insurance acts as financial protection rather than a financial investment. Sitting on the fence about such a serious issue can be detrimental to your needs, as well as the needs of your family. Never undervalue what constant protection can mean for your quality of life. (For related reading, see: HSA vs. FSA: Navigating the Alphabet Soup.)

Ash Toumayants is the founder of Strong Tower Associates in State College, Pennsylvania. Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Strong Tower Associates and RWA are not affiliated.