Planning for Long-term Care

In light of our population’s current demographics and projected longevity, there is a heightened need for long-term care planning.  More people than ever before are expected to require long-term care services and rely on those services for a greater period of time.  In addition, health care costs tend to rise more quickly than general inflation which raises the question of how to pay for long-term care services.  Can you self-insure or should you purchase insurance coverage?  How will you manage a long-term care need?

What is long-term care?

Long-term care services are those which are important for the quality of your life and generally include help with activities of daily living, home care, nursing home care, respite care, and adult daycare.  

What are the costs?

The cost of care depends on the location and extent of the care.  Assisted living facilities, full-time nursing homes, and full-time in-home care are the most costly options.  According to Genworth’s Cost of Care Survey, by 2040 the national average cost for an assisted living facility is projected to be $93,195 per year, with a private room in a nursing home facility expected to cost up to $191,177 per year.  The expenses could be much higher or lower based on where you live.  

How to pay for long-term care?

Those in need of care usually turn to family for help.  As of 2015, approximately 41 million people were providing unpaid care for a family member.  Those who do not wish to or cannot rely on family for help may seek support from their health insurance; however, health insurance (including Medicare) will not cover long-term care services.  As a result, you must rely on your financial assets, long-term care insurance, or Medicaid.  Medicare is a needs-based program that requires you to deplete most of your assets prior to receiving benefits and is viewed as a last resort.

Long-term Care Insurance (LTCi)

For individuals seeking to purchase coverage, the American Association for Long-Term Care Insurance (AALTCI) recommends that individuals purchase long-term care policies while in their 50s or early 60s.  While this is potentially two or more decades before you may actually use the policy, you are more likely to receive favorable underwriting and have more coverage and policy options, which can include important riders such as inflation protection.  In addition, aging comes with unexpected health issues that could cause you to become temporarily or permanently uninsurable.

Types of LTC Policies

  • Traditional Policies (aka, “pay-as-you-go”) require annual premium payments and do not accumulate a cash value.  The advantage of this type of policy is that the cost per unit of benefit is very low, so if you go on-claim soon after purchasing the policy, you will immediately recoup your premium outlay.  In addition, the premiums may be considered a medical expense for tax deduction purposes; these policies are generally considered “qualified” for tax purposes.  The primary risk is that your premiums can be increased by the insurance company if approved by the state’s insurance commissioner.  Recently, CalPERS approved a 90% premium increase on its long-term care programs that will take effect over the next two years.  The premium increase puts policy owners in a tough position.  Do they continue paying the premiums with the risk of the premiums being increased again, let the policy lapse, or agree to a reduction of benefits? 
  • Hybrid Policies are typically life insurance policies with a long-term care benefit rider.  The life insurance portion is minimal, but the long-term care benefits can be three-to-five times the death benefit, depending on your age, health, and insurability.  The primary advantage is that the premium is fixed and cannot be increased, so there are no premium increase surprises down the line.  The primary disadvantage is that the premiums are not qualified and must usually be paid upfront in a large single payment in order to receive the highest benefit limits.  The substantial outlay could be cost prohibitive for many individuals with modest resources who are trying to allocate their capital toward other priorities such as retirement, real estate, education, or debt repayment.
  • Partnership Policies are similar to traditional policies and are designed for those with limited resources who will likely rely on Medicaid for long-term care.  Partnership policies allow you to keep a portion of your financial assets and still qualify for Medicaid.

What to do next?

Planning for long-term care is personal and the information above is only the tip of the iceberg, so the next step is to learn more about long-term care and coverage options. The Shopper’s Guide to Long-Term Care Insurance and 100 Must-Know Statistics About Long-Term Care are excellent places to begin your research.  

If you have any general questions about long-term care insurance or if you would like us to review your current policy, please contact us at your earliest convenience.  If a policy may be appropriate for you, we can connect you to professionals in our network.