Planning for Long-term Care - Episode 36
If long-term care is one of those financial planning items you haven’t tackled yet, this information is for you!
Today I will talk about some lesser known long-term care statistics, how to decide if you can self fund for long-term care, and the two types of long-term care insurance along with the pros and cons of each.
Listen to Episode 36 Here:
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LTC Statistics That Don’t Often Make Headlines
Let’s start with everyone's favorite - some statistics! Obviously I'm kidding, but the numbers don't lie.
About 70% of people turning 65 this year will need some form of long-term care services in their lifetime, and 24% will need care for more than 2 years. The average duration of care for women is 3.7 years and for men is 2.2 years.
However, what isn’t often shared is that only about 13% of people who are aged 65 today will spend over $150,000 in their lifetime on out-of-pocket long-term care expenses.
In fact, about 63% of people aged 65 today will have $0 out-of-pocket long-term care expenses during their lifetime. The remaining 24% will fall somewhere in between.
When you pull back the curtain, a relatively small percentage of the population is truly at risk for an extreme long-term care event. But that doesn’t mean you should roll the dice.
Everyone needs to have a plan for long-term care in retirement. It could be self-funding, which means paying for long-term care expenses out of current savings. It could be buying insurance. Or it could be a little of both.
5 Steps to Determine if You Can Self Fund LTC
Ask yourself this: Can your current retirement savings absorb a long-term care event without the need for insurance and without jeopardizing your retirement plan?
It’s ok if you don’t know the answer to that question right now. I’m going to walk you through 5 steps to determine if you can self fund for long-term care.
1. Determine your chances and timing of needing long-term care.
Women have longer life expectancies and are more likely to need long-term care than men. Women, on average, need care for longer periods of time than men. Your current age, family health history, and other factors affect that as well.
For example, if you are under age 50, odds are in your favor that a long-term care event is not right around the corner. If you are closer to age 60 or 65, the odds start to increase.
2. Estimate the cost of a long-term care event.
The cost of long-term care varies based on where you get your care, your geographic location, the level of care that you require, and other variables. Some of these variables are unpredictable, but to help you, here's a great cost of care calculator.
I used this calculator and plugged in Illinois and found that the annual median cost for in-home care in 2020 was about $58,000. For an assisted living facility, it was about $55,000. And for a private nursing home room, it was almost $85,000.
If you are 45 and don’t anticipate needing long-term care for 20 years, you are going to need to factor inflation into your calculation. This calculator will also help you do that.
3. Determine what a realistic scenario might look like for you.
For example, you might not want or need a private nursing home. In fact, fewer people are choosing nursing homes during long-term care events, and hundreds of facilities are closing each year as more people opt for in-home care, which is cheaper and often more comforting.
Plus, you might not consider yourself average. You might be in great health and have great family health history, leading you to assume that the odds are not very likely that you end up in that very small percentage of the population that has a large 6-figure long-term care event.
4. Run a retirement analysis to see if your current plan can absorb a long-term care event.
You’ve got your estimated costs customized to your unique situation. From there you can determine if your current assets are sufficient to fund your retirement goals and support your projected long-term care costs.
At my firm, we use sophisticated financial planning software to run simulations, but if you don’t have access to such software, you can build models in Excel or search online to find a retirement planning tool that fits your needs.
To keep it simple, I would suggest thinking of your projected long-term care costs as another expense line item in retirement. Through this exercise, if you find out your current assets are sufficient to cover the costs of a long-term care event in retirement, then you can conclude that you can probably self fund and skip buying an insurance policy.
However, I would suggest taking this analysis a step further before you make that conclusion.
5. Plan for a worst-case scenario.
While I think it’s a good exercise to go through the previous steps to determine what you might need for a long-term care event based on your unique situation, I also assume you don’t have a crystal ball.
Perhaps you were too conservative in your estimates and assumptions. Using the long-term care calculator, try coming up with what might be a worst-case scenario for you and your spouse, and then re-run that retirement analysis.
Maybe you assume that you do opt for a private nursing home and assume that both spouses have a multi-year long-term care need.
If you’ve done a great job saving for retirement and your expenses are under control, you might find out that even in an extreme situation, your retirement plan would remain intact.
If you do find out that a worst-case scenario would wipe out your retirement plan, consider what you would need to do in that situation to get your plan back on track and recover from that event.
For example, what if you downsize your home or cut expenses in other categories. Or if you’re still working, what if you retired a few years later giving you some more time to pad your retirement savings?
If you determine that you can’t self fund for long-term care, buying insurance is likely a smart move since most of us will experience some sort of long-term care event during our lifetime.
When Should You Consider Buying LTC Insurance?
A common question people ask is, when should you consider buying long-term care insurance?
There is no perfect age for buying long-term care insurance and getting a “good deal.” Similar to a life insurance policy, you can buy long-term care insurance when you are younger and pay less per month but pay for that insurance for a longer period of time.
An AARP article suggests that couples should shop for a policy at age 55 if they want the best combination of coverage and affordability. Single individuals should consider coverage between the ages of 60 and 65.
2 Types of LTC Insurance Options
There are two types of long-term care insurance to consider:
- A traditional long-term care policy, also called a stand-alone policy
- A hybrid policy
1. Traditional Long-term Care Policy
A traditional long-term care policy works similar to your typical auto insurance policy. You pay a monthly premium to purchase a certain amount of coverage. Just like with your auto policy, your monthly premiums may be subject to increases over time.
A statistic you might come across online will often say that the average 55-year-old female pays about $3,000 per year for a basic traditional insurance policy with an initial pool of benefits of $164,000. And the average 55-year-old male will pay about $2,000 per year for the same policy.
However, those statistics are usually based on policies that aren’t optimized properly and don’t typically include inflation riders or ideal elimination periods, which I’ll talk about shortly.
For an optimized policy with an inflation rider, we see people in those age groups paying closer to $5-7,000 per year for the same $164,000 of coverage.
Pros of a traditional long-term care policy:
- The annual premiums require less up-front money than a hybrid policy, which I will talk about next.
- You can customize these policies to fit your exact needs. You can buy as much or as little coverage as you need and choose from a wide range of riders to attach to your policy.
- Traditional policies typically provide more value when compared to a hybrid policy.
Cons of a traditional long-term care policy:
- The cost of your insurance is not guaranteed and can be increased by the insurance company.
- You may never need the insurance benefits you are paying for.
- You have to submit receipts for reimbursement, and you have to be cared for by a licensed medical worker. You aren’t able to compensate friends or family members who might be willing to provide care for you.
2. Hybrid Long-term Care Policy
The other option available for long-term care is a hybrid policy. A hybrid policy combines long-term care benefits with a life insurance policy.
These policies are funded with a single lump sum of money, and you don’t make any other recurring payments. For example, a healthy 55-year-old man could buy a hybrid policy for $100,000 and potentially get long-term care benefits worth $500,000. He may also get a death benefit of $150,000-200,000.
However, if he taps into the long-term care benefit, that death benefit can be reduced, sometimes down to $0 or down to a minimum guaranteed death benefit.
This means your long-term care benefits are partially being funded by the life insurance death benefit that is part of the contract.
Some or all of the hypothetical $100,000 used to buy this hybrid policy can be returned if he changes his mind a year or even 10 years down the road. This is referred to as the “return of premium.”
The amount you can get back depends on the insurance company and the policy that you buy.
Hybrid policies are a bit more confusing than traditional policies, so the list of pros and cons that I’ll cover is longer than for traditional policies.
Pros of a hybrid policy:
- Hybrid policies don’t typically have large minimum purchase requirements. This allows you to buy multiple policies to provide even more flexibility. For example, instead of buying a $100,000 policy, perhaps you buy four $25,000 policies.
Assuming the policies you buy include a full return of premium, you could always cancel one of these $25,000 policies if you needed some extra cash or decided that you had too much insurance. If you only had a $100,000 policy, you wouldn’t be able to cancel only a percentage of it.
- Hybrid policies can be funded by a 1035 exchange. A 1035 exchange allows you to transfer funds from one insurance product to another while also deferring any capital gains.
For example, maybe you bought a whole life insurance policy 10 years ago, and you know you don’t need it but you’re not really sure what to do with it, especially since you would have to pay capital gains taxes if you cancelled it.
One option might be to consider exchanging it into a hybrid long-term care policy, which might end up being more useful to you than a whole life policy. This would allow you to defer capital gains and buy long-term care coverage without having to dip into your cash savings.
Although my firm doesn’t recommend buying whole life because there are usually more efficient ways to achieve the goals that someone might use a whole life policy for, many people have whole life policies they purchased years ago, and this 1035 exchange is a great option if you have a decent amount of cash value built up and it will prevent a taxable event.
- Hybrid contracts can sometimes be easier to qualify for because underwriting is typically less stringent. In some cases, those who might not be approved for a traditional long-term care policy might be approved for a hybrid policy.
- You can pay a family member or friend to be your caregiver in some cases, which you cannot do with a traditional policy. Some hybrid policies don’t even require receipts. Some will issue cash to you rather than reimbursing the cost of actual care.
- Your premium is guaranteed on a hybrid policy. When you make that single premium payment, you’ll know the exact coverage you are getting in return.
Cons of a hybrid policy:
- A hybrid policy is more expensive when compared to a similar traditional long-term care policy. That’s because you are bundling two different products into one, which will inherently create more risk for the insurer and cost more money.
This is similar to life insurance where it is cheaper to buy term insurance instead of whole life.
- Hybrid policies aren’t as customizable. For example, the elimination period, which is the amount of time that must pass before the insurance company starts paying out for long-term care needs, can often start at 90 days for hybrid policies.
Many hybrid policies also don’t include an inflation protection option, which is a big concern with the rising cost of long-term care.
- Hybrid policies require a relatively large sum of money to get proper coverage. A single premium of $100,000-$200,000 is not uncommon. Not everyone has 6 figures lying around to put into a long-term care policy.
Even if you do, you might determine that taking that money and putting it in a separate investment account that’s earmarked for long-term care in retirement is a better solution than handing it over to an insurance company.
- Hybrid policies can be very confusing to navigate and understand. With the right salesperson, the benefits can appear to outweigh any of the drawbacks making it seem like a no brainer without fully understanding the nuances and limitations of the policy you are buying.
Other options to consider
Given the cost of both traditional and hybrid long-term care policies, some couples opt to use a combination of self-funding and insurance.
For example, some couples only buy insurance on the female spouse because women have longer life expectancies and are more likely to need long-term care than men. In fact, 64% of long-term care claims were paid out to women in 2018.
Bottom Line: No matter if you are self-funding, purchasing insurance, or doing a combination, everyone needs to have a plan for long-term care!