With people living longer than ever before the issue is not whether we will need long-term care but, more likely, when. Recent statistics reveal that more than two out of five Americans will require long-term care at some point in their lives.
With the average life expectancy reaching well into the 80s, the odds will increase even further. Chances are, paying for long-term care will be a critical issue for nearly every one of us as we, or our loved ones, begin to cope the ails of aging.
The Costs of Long-Term Care
The costs of long-term care are wide ranging depending on the type and length of care required. In 2016, care provided by a private nursing home cost nearly $300 per day, or more than $85,000 per year depending on location (semi-private room). Home health care can be less expensive depending on the skill level required. On average, a home health care service charges $131 per day.
Long-term care costs are increasing at a faster rate than inflation, an average of 4.5% per year, over the last decade. As the population continues to age and demand for long-term care services increases, the costs are expected to increase even faster.
You really only have two options to prepare for long-term care expenses - accumulate enough cash reserves to have available or buy long-term care insurance. Otherwise, you will have to rely on the default option which is to spend down your assets, so you can qualify for Medicaid.
Fortunately, there are ways to pay for long-term care that don’t involve draining a family’s assets. In many cases, family members are willing and able to provide care. However, many situations also reach a point where it either becomes impractical or too emotionally draining for the family caregiver and they eventually turn to some kind of professional care.
Long-Term Care Insurance
Since its introduction four decades ago, long-term care insurance has gone through several iterations largely due to the rapidly evolving state of nursing home care and its escalating costs. Premium costs have increased, making long-term care a major purchase even for younger couples. A typical long-term care policy covering a 55-year-old couple costs about $5,000 annually. The policy pays a maximum daily benefit of $150 which is linked to a 3% compound inflation rider.
That can be hefty outlay for a couple trying to maximize their retirement savings. For many people, long-term care insurance should be thought of as one prong of multi-pronged strategy to cover long-term care expenses. Efforts to increase savings or reduce lifestyle expenses can form the foundation of the strategy with long-term care insurance filling in the gaps. This might allow you to purchase a policy with a smaller daily benefit and less inflation protection.
Insuring a Younger Spouse
If the cost of long-term care coverage is a prohibitively expense for a couple, they can consider alternative strategies. For example, they could consider just insuring the younger or healthier spouse because she will most likely be the caregiver for the older or less healthy spouse and may not have anyone around to provide care for her.
Health Savings Accounts
A health savings account (HSA) can also be the source of tax-free money to pay for long-term care premiums. The amount you can withdraw tax-free annually from an HSA depends on your age - $1,560 for ages 50 to 60, $4,160 for ages 60 to 70 and $5,200 for ages 70 and older.
Another way to fund long-term care insurance is through hybrid or linked-benefit insurance products. You purchase a life insurance or annuity product for its intended purpose (death benefit or lifetime income) and it also provides the living benefit of long-term care protection.
- Life Insurance with Accelerated Death Benefit Rider: Many insurers offer life insurance policies with accelerated death benefit riders that will cover the cost of “living benefits” such as catastrophic or long-term care. The cost of the accelerated death benefit rider is typically much less than what you would pay for a separate long-term care policy.
- Combination Insurance Policies: Several companies have introduced a type of policy that combines life insurance with long-term care protection that guarantees either long-term care payouts or a death benefit. Either of these life insurance/long-term care solutions are especially attractive for people who still have a need for life insurance and would like to leverage their solution to cover multiple needs.
- Hybrid Annuities: Some insurers now offer an annuity that combines the attractive properties of tax deferral and guaranteed principal along with a long-term care benefit. With these annuity contracts, the annuity principal is leveraged to provide a multiple of the principal as a long-term care benefit. For instance, a $100,000 premium could create a pool of money that would pay out more than $300,000, tax free, in long-term care benefits.
Time Is Your Most Valuable Asset
There is no getting around the staggering cost of long-term care, but there are ways to mitigate the financial impact it can have. Whether the best solution is to accumulate the extra capital to cover the cost, transfer the risk to an insurance company or some combination of the two, the most valuable asset we have is time. The less of it you have, the more expensive the solution is going to be. The best use of your time right now is to have a serious discussion about addressing long-term care and finding the best solution to pay for it. Recent articles by Lisa LaMarche: Long-Term Care Insurance: What to Consider
Disclosure: This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.