By Moe Ansari
There are a lot of things you don’t want to gamble with in life, like your retirement savings, how you raise your kids, or your health. Unfortunately, many Americans take one particular risk with their health, possibly without even realizing it, and that’s neglecting to make a long-term care plan. (1) Since 70% of people will need some form of long-term care during their lifetimes, it’s critical to have a plan to pay for these costs. (2)
When you are healthy and thriving, it’s easy to focus solely on building your savings to provide for your basic retirement expenses and forget about the potential need for long-term care as you age. But no matter what your health looks like today, creating a long-term care plan now will empower you to research your options and choose strategies that are the best fit for you.
What’s The Long-Term Care Estimate?
Long-term care costs are so high that they could potentially wipe out a bulk of your retirement funds. On average nationally, it costs $280 per day or $8,517 per month for a private room in a nursing home. (3) To make matters worse, because of their longer life expectancy, women pay significantly more than men for long-term care. The average amount of time women require long-term care for is 3.7 years (or around 44 months), adding up to $374,748 in expenses in today’s costs for that private room. (4) For men, who need long-term care for an average of 2.2 years (or around 26 months), that equals $221,442.
And costs are only projected to increase. From 2019-2020, the median annual cost for home health aides rose over 4.5 percent. (5) By 2030, the average cost for long-term care services is expected to double. (6) These costs can vary based on the level of care and amenities needed, as well as the size of the room and the location, so your first step in making your own long-term care plan is to decide what type of care you prefer.
What’s Your Ideal Long-Term Care Situation?
If you have a family history or early signs of Alzheimer’s or dementia, or if you suffer from a chronic disease that will require ongoing care or daily assistance, look into facilities that offer the care you’ll need, and share your thoughts with your family. Would you prefer to live in a nursing home or would you like nurses and assistants to come to your residence? Do you want a religious community of care? There are several preferences to take into consideration when considering your long-term care plan.
Having the option to make these choices yourself lends much-needed autonomy to your long-term care plan. If you wait until you need it, you may not be in good enough health to make the decision, or the size of your savings might determine the care you receive. Whether you’re worried about potential health concerns or want to protect your hard-earned wealth, it’s important to understand the long-term care insurance options available to you and whether or not a policy makes sense for your lifestyle and needs. It also helps alleviate the burden on your kids if you have a plan in place.
Build Your Long-Term Care Plan
Long-term care coverage isn’t cheap, but it pales in comparison to long-term care costs. Here are some options to consider when creating your long-term care strategy.
1. Traditional Long-Term Care Insurance
With traditional long-term care insurance, you pay a premium in exchange for the ability to receive benefits if they are needed. If you need long-term care at some point, the policy provides you with money to pay for it. If you never need long-term care, then you receive no benefits. It’s a “use it or lose it” policy.
Just like any insurance policy, you will have some coverage choices to make.
Customized Coverage
You can choose the level of insurance you want and select the daily benefit amount for care in a nursing home. You can also add home-care coverage if that is a priority for you. In order to choose the right coverage amounts, you need to know what the cost of long-term care looks like in your state. For example, a private room at a nursing home in California will cost an average of $10,646 a month, and hiring a home health aide could set you back over $64,000 for the year.
Length Of Coverage
You must also decide on the length of time you want the benefits to be paid. Common options are one, two, three, or five years, or for your lifetime. Logically, the longer the benefit period, the higher the premiums you will need to pay.
Benefit Stipulations
Your policy will also indicate “benefit triggers,” or conditions which must exist in order to receive benefits from the insurance company. A tax-qualified plan only pays benefits once you are unable to perform two of six activities of daily living without substantial assistance for at least 90 days, or have a cognitive impairment like Alzheimer’s. Non-tax-qualified plans may have less restrictive benefit triggers.
Inflation And Premiums
If you want, you can have your benefits increase with inflation to match future care costs. It is also important to note that premiums can increase as they are not usually set in stone.
2. Life Insurance With A Long-Term Care Rider
With a traditional long-term care policy, people sometimes feel that if they buy it and don’t use it, they have wasted their money. Because of this, several hybrid products have emerged. One very popular solution is a life insurance policy with a long-term care rider. This strategy is enticing because if long-term care is needed, the funds are available through your policy’s death benefit. If you don’t spend the total benefit available, your beneficiaries will receive the balance upon your death (tax-free), thus no wasted money.
If you need life insurance, getting your long-term care coverage as a rider may be a good option. This way, someone will be benefiting from the premiums you are paying, whether it is you or your heirs. Plus, because the policy accumulates cash, the insured individual can access it if needed, allowing them to recoup a portion or all of their premiums. This type of policy involves permanent life insurance which, of course, has higher premiums than term insurance. The long-term care rider increases the premium further.
3. Annuity With A Long-Term Care Rider
If you don’t need life insurance, another combination product may be better suited to your situation. If you purchase a fixed annuity, you may have the alternative of adding a long-term care rider onto the contract for an additional cost. Since 2010, the IRS allows for the long-term care portion to be used tax-free. (7)
After purchasing the annuity, you would select the amount of long-term care coverage you want, often two to three times the face value of the annuity, as well as the length of time you want coverage. Finally, you have to decide if you want inflation protection.
This option makes money available to you if you need long-term care. Otherwise, if you have not annuitized, you can cash out the annuity when it matures (in which case you would lose your long-term care coverage) or let it accumulate and ultimately pass on the assets to your heirs.
Obtaining long-term care coverage through an annuity can be appealing because it is generally less expensive than stand-alone insurance and you can receive coverage without medical underwriting. Annuities tend to be less common than the other choices, though, because of the current low interest rates available from the annuity and the large up-front investment.
4. Save On Your Own
Consider starting a savings plan specifically for future healthcare needs. One option is to create a separate, high-yield savings account and contribute a specific amount every month, building a contingency fund for whatever healthcare expenses come your way. If you end up not needing long-term care, the money is still yours and can be used for your living costs, unexpected expenses, or an inheritance for your heirs.
Start Planning Today
Regardless of where you are in life and the financial obstacles you face, the important thing is that you start planning for this aspect of retirement. We know that thinking about the need for long-term care can be deeply unsettling and confusing. That’s why our team at Compak Asset Management is here to help by using our comprehensive financial planning services. If you have questions about your long-term care options and want to make sure you have the coverage you need, get in touch with us today by calling 800-388-9700 or email investments@compak.com for a free consultation to get on the road to financial success!
The information in this discussion is current (and, we believe, accurate) as of the publication date but things can change. Be sure to talk with your financial and tax advisors about your own situation when making investment decisions.
About Compak Asset Management
Compak Asset Management is an independent wealth manager providing custom-tailored portfolio and retirement solutions. Founded in 1999 by Moe Ansari, we are a fiduciary dedicated to providing clients with some of the best advice, ideas, and products to enhance their lives. Compak’s customized solutions and experienced team combine to deliver world-class wealth management and tailored financial plans to meet our clients’ financial needs. To learn more about Compak, please visit www.compak.com. While you are not required to purchase insurance through Compak or its insurance-licensed associates, if you do so, we will earn customary commissions separate from any advisory fees assessed for investment management.
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(1) https://www.advisortoday.com/2017/10/26/ltc/
(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html
(3) https://www.genworth.com/aging-and-you/finances/cost-of-care.html
(4) https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
(6) https://www.americanactionforum.org/research/the-ballooning-costs-of-long-term-care/
(7) https://longtermcareinsurancepartner.com/blog/using-annuities-to-pay-for-long-term-care