How to think about Long-Term Care

Long-term care is one of the most difficult financial issues retirees face. As we age, many of us require assistance such as feeding, bathing, and clothing that is not covered by medical insurance. The need for long-term is common.  A US Health and Human Services study from 2019 found that 48% of retirees who reach the age of 65 will need some type of long-term care during their lifetimes. And long-term care is expensive. The same study found that the national median cost for a semi-private room in a skilled nursing facility in 2019 was $116,800 per year. A multi-year long-term care need can cost hundreds of thousands of dollars.  So how can retirees plan for long-term care? Should retirees self-insure or purchase long-term care insurance? In this article, we’ll explore the pros and cons of both approaches to help you make a well-informed decision.

Long-Term Care Insurance

The primary benefit of long-term care insurance is peace of mind, knowing that you have some protection against a long-term care event. These policies can also help protect your estate and reduce the financial burden on your family in the event that your assets are depleted.

Unfortunately, long-term care insurance can also be very expense.  While policy terms can be complex, the American Association for Long-term Care Insurance estimates that a $165,000 policy purchased at age 60 would cost a married couple $5,670 per year.  Note that in California long-term care policies tend to be even more expensive due to the high cost of living and regulatory environment. Since the benefit would likely not be used until their 80s or 90s, the cumulative cost of the premiums can approach the benefit payout.

Even after you have purchased a long-term policy, premiums are often not guaranteed to stay the same. Insurance companies can raise premiums and often do. This can make analysis of the financial benefits of a long-term policy difficult.

Finally, long-term care insurance may not be available due to medical conditions. Underwriting a long-term care policy is similar to underwriting for life insurance. A chronic or even recent medical issue can result in the rejection.

Self-insuring

Of course, if you do not purchase long-term care insurance, then by default you are ‘self-insuring’, meaning that you will need to cover the cost of a long-term care need yourself. Given the high cost of insurance, this approach is not irrational. However, you are choosing to bear this risk yourself. 

So, what would self-insuring for long-term care look like? The first line of defense is your income.  If you have a high retirement income this puts you in a strong position to pay for your care. The second line of defense is often your assets, such as retirement accounts or investment properties that could be sold without damaging your lifestyle. Often the last line of defense is your personal residence, which could potentially be sold and the equity used to pay for long-term care later in life. If the long-term care need is several hundred thousand dollars, then this cost will reduce your estate, and could even put a burden on your family if the assets are depleted. If you are self-insuring then you should plan to have assets available later in life to cover these costs.

The hybrid approach

Some retirees take a combination approach by buying a smaller long-term care policy. The small policy is less of an investment but also provides some coverage for a long-term care event.

So, what is right for you? Everyone’s situation is different. If you have a concerning family health history or believe that a long-term care issue could deplete your assets, then purchasing a long-term care policy may be a good path. However, if you have planned well for retirement and believe that you could cover a long-term care event with your assets, then self-insuring might be a better option.

We do not sell long-term care insurance, which allows us to be an independent voice in the decision. If you would like to discuss your situation, please feel free to give us a call.

Source:  https://aspe.hhs.gov/reports/what-lifetime-risk-needing-receiving-long-term-services-supports