You have probably heard the statistic that 70% of people will need some form of long-term care in their lifetime. Add to that the high cost of long-term care services and you have a financial planning issue that sounds like the stuff of nightmares. But is it worth all the worry it causes retirees? What is the actual likelihood you will need it? How much can you expect to pay? And can you address funding long-term care in a way that can provide you with the peace of mind you need to sleep at night?
The potential for a long-term care need is something that needs to be addressed in a financial plan. But I think a lot of unnecessary fear surrounding long-term care comes from people who, unsurprisingly, sell products to cover this need. They dwell on broad statistics that often lead people to believe they will be in a nursing home burning through their savings for the better part of a decade.
Taking a deeper look at the numbers paints a less dismal picture. It turns out, the average duration a person needs any type of long-term care is 3 years. When most people think of long-term care, they automatically think of full-time care in a nursing home. But this three-year period is likely to be made up of different phases of care and usually involves less time in a nursing home than most would expect.
The majority of people who require long-term care receive it at home from a family member who is their sole caregiver.
65% of people will need some form of home care, but most people don’t even need to pay for that home care. Only 42% of people will need home care they pay for and the average duration of the time they will pay for it is less than a year.
What about long-term care in professional facilities? After all, that’s what really scares people.
It turns out only 37% of people will need some type of long-term care in a professional facility. Not the majority, but a large enough probability to cause some people concern. But the average duration of care in these types of facilities is a year or less!
So given all these probabilities, what should we plan for? Financial plans should not be based on average expectations, so it may make sense to plan on being one of those unlucky people who spend an above average time in a nursing home. However, assuming a person will be in a nursing home for 10 years when the average is only one year is probably overly pessimistic. There’s no perfect answer here. It’s just a matter of finding what level of preparation gives people peace of mind while staying within a reasonable range based on the probability of them needing care.
I think this is the scarier side of the long-term care equation. If people do end up needing care, it can be very costly and may cause them to burn through their nest eggs quickly. Let’s look at the cost of various types of long-term care, starting with long-term care services inside the home and adult day care that helps take the burden off the primary caretakers.
The annual cost of home care can easily run into the $40-$50,000-dollar range. Full-time care in professional facilities is even more expensive:
Though assisted living facilities are similar in cost to home care services, a room at a nursing home could easily cost double that amount, in the $70-$90,000-dollar range.
The good news is, people don’t necessarily have to plan to fund the entire amount of the cost of a room at a nursing home. Most people receiving long-term care also have other sources of income they can use including social security, pensions, or an investment portfolio. A person could reasonably plan to fund half of the total amount that will be needed to pay for long-term care and cover the rest with income from other sources.
With realistic expectations about the amount of time they will need to cover expenses and how high those expenses can be, people can make informed decisions about planning for those expenses in advance. There are several different options.
For many people, having the guarantee of an insurance company to cover their expenses provides them with peace of mind that they will not need to deplete their assets should a long-term care need arise.
With long-term care insurance, a person pays a stream of premiums to buy a certain amount of insurance coverage for long-term care expenses when they occur. Benefits are paid out when a person can’t perform two of the six activities of daily living: bathing, dressing, transferring, toileting, eating, and continence. Benefits can be used to pay for nursing care in professional facilities and for some home care expenses. But be careful, they can be sticklers about who provides those services and whether they can be a family member.
There are some issues with long-term care insurance though. One is that it may be prohibitively expensive, more so the older you are. Premium hikes and reductions in coverage have also historically been issues. A lot of this came down to the fact that they didn’t have accurate assumptions to begin with, and had to make changes to make the plans sustainable. Fortunately, they have learned from their mistakes and I expect this to be less of a problem in the future.
Long-term care policies do not actually cover you all the way until your death, but have a maximum coverage period of a specified number of years. Though most people will get insurance with a coverage period that is longer than the amount of time they are likely to need long-term care, there is still a chance that a person could outlive their coverage.
Another downside of purchasing long-term care insurance is that it’s a “use-it-or-lose-it” proposition. If a person doesn’t end up needing long-term care, any money spent on premiums was wasted. That is the nature of any type of insurance, people pay premiums to make sure they are covered if something happens and they need it, but that doesn’t mean they should be disappointed if the need never arises.
To self-fund, a person makes a financial goal to have the amount needed for long-term care expenses set aside at the time he or she needs it. Most people who are making this decision are retired or close to retirement, so they typically fund this goal by reducing their annual spending each year to ensure they have enough money to cover long-term care expenses if they arise.
This approach foregoes the guarantees of purchasing insurance, but it also has some benefits. It’s simpler – no need to remember to pay your premiums each year and you don’t have to deal with insurance companies.
The key advantage is if a person doesn’t end up needing long-term care, the money they set aside for long-term care can be passed on to their heirs. This benefit is so attractive it has resulted in the development of hybrid policies that aim to solve some of the issues people have with long-term care insurance while retaining the elements people like.
Hybrid policies consist of combining long-term care insurance with life insurance or an annuity. For example, a hybrid life insurance policy includes a long-term care policy bundled with a whole life insurance policy. The cash value is invested and the policies generally will provide a minimum interest rate for cash value growth. When it comes time to pay for long-term care expenses, they are first subtracted from the policy’s cash value until it is completely depleted before the insurance company starts covering the expenses with their own funds. For this reason, they could be thought of like a high deductible long-term care policy since you must use your cash value before the insurance company must pay anything.
A key advantage is that if the person doesn’t end up needing long-term care or doesn’t use up the entire amount of their coverage, their heirs will receive the death benefit of the life insurance policy minus any long-term care claims.
Though hybrid solutions may not be the optimal long-term care funding solution in and of themselves – as they tend to invest the cash value in low risk and therefore low return securities – they can be a good way to exchange old “junk” policies into better policies tax free via a 1035 exchange.
Most people are surprised to find out that Medicare for all intents and purposes does not cover long-term care. Medicaid can, but is generally the option of last resort if people are unable to pay for insurance or self-fund. One of the key issues with Medicaid is the fact that reimbursements from Medicaid to facilities for treatment tend to be lower, so the quality of care people receive tends to be lower as well. If people think they will ultimately rely on Medicaid to pay for long-term care, they should consider buying some long-term care insurance coverage if the policy has a care coordination program to supplement Medicaid coverage so they have the potential for better care.
Long-term care needs can materially impact a person’s financial lifestyle and in extreme cases, cause them to deplete their assets and become a burden to their loved ones. But with careful planning and accounting for long-term care needs in advance, this can easily be avoided. Like with most financial planning issues, how a person funds a potential long-term care need is more of a matter of what works for them than anything else. I think it is extremely beneficial to seek impartial advice on the matter, and we at Ruedi Wealth are always happy to provide guidance for those of you who may be wrestling with this decision. At the very least, you now have a good basis for a conversation with you own advisor about how to plan for long-term care.
Want to hear more? Listen to Paul Ruedi and David Ruedi CFP® discuss long-term care on a recent episode of Paul Ruedi’s On The Money radio show. Click play to listen.