Today more than ever in the past people will have a need for some form of long-term care. So why is it a much larger need now than it was in previous generations? Well, for starters people are living longer than in earlier generations and are thereby requiring assistance in their golden years. Also, in earlier generations family tended to care for the elderly more as a family unit would stay relatively close to one another geographically. So in an age where medical advancements mean longer life spans and now more than before families are spread out across the whole country. These reasons alone mean there is a much larger need for long-term care in the country. Now here comes the hard part of the question, how to pay for the long-term care we are projected to need in our older years?
Many people and especially couples depend on the other spouse to care for them when the time comes, but that is becoming increasingly difficult to do. As we age and get older, it becomes more and more difficult for some to manage and live day to day without some level of assistance. Yes, a spouse or child may be able to help, but it is not always the most practical or sustainable solution. One reason is it is expensive to care for someone, and a lot of the time specialized assistance is required that most of us are simply not qualified to fulfill. Hence the reason why it is estimated that 70% of people 40 or older will at some point require some form of long-term care. This includes nursing homes, assisted living centers, adult day care and home health care providers. And these services do not come cheap.
One of the most popular ways to finance long-term care needs is through retirement savings, though not encouraged by most financial experts. The average person can expect to pay somewhere close to $140,000 over their lifetime for long-term care needs in one form or another. And if you need this type of care later in your retirement the funds may not be there to cover the expenses. Or if you have a spouse they may need these funds to cover their living expenses plus the fact they too may need some form of long-term care as well. Meaning for a couple they can expect to pay somewhere close to $280,000 in combined long-term care needs. If that figure does not get your attention, I am not sure what will, but that is well over a quarter of a million dollars just for long-term care. For most people that would represent a major component of their retirement savings.
A newer way to cover these costs is also one that is not highly endorsed by financial planners, and that is a hybrid annuity or life insurance policy that also doubles as long-term care insurance. If you die and have not used the insurance portion of the policy, you leave a higher annuity payment or life insurance death benefit to your survivors. As these are newer planning tools that are also extremely difficult to analyze. For now, you just need to know that these are an option but not the focus of this post.
Now on to the most known source of long-term care and that is insurance specifically designed to cover the needs associated with long-term care. When these policies came out around 30 years ago, there were many insurance companies offering these policies and all with different special features. But over the years the insurance business made some poor assumptions on payouts and miscalculated the number of voluntary lapses in policies. This has made it extremely difficult for the insurance companies to remain profitable and many have simply left the market due to lack of profits. And the companies that remain now seem to charge higher premiums than we saw when these policies first came out. And like life insurance, these policies are cheaper when you purchase them when you are younger and healthier. But let’s face it when you are 30 or 40 you are not thinking of long-term care even though this could be the best possible time to just that.
Finally, is the method I recommend if you are structured and will not waiver from your goal. And that is to see what a long-term care policy costs for whatever age you are. Here, just as with buying a policy, the younger you start, the better off you will be. In my approach, you simply pay yourself the monthly premiums and save them in a taxable account that is invested in a low-cost mutual fund or exchange-traded fund for the long haul. Most long-term care insurance policies are capped at the amount they will pay noted as a number of years or months. If you are younger, say in your mid-twenties, your policy should not be more than $2,400 annually. Meaning if you were to invest that $2,400 in a mutual fund that returned 7.5% annually for 35 years until about the age of 60 you would have approximately $400,000 saved for your long-term care needs. If you are married or have a significant other and do the same for them, you would have a combined $800,000 which is far greater than the $280,000 you would expect to pay. But here just as with long-term care insurance you must be disciplined and make sure you pay yourself the premium amount as you would with actual long-term care insurance.
But no matter what do not think that your health insurance will cover the costs of long-term care because they do not. And do not count on Medicare to cover these expenses either as they will not cover them either. Yes, Medicaid will pay for your long-term care but only after you have exhausted all other means to pay for it. Then the government can and will go after your estate if you have one to pay for its losses on your care.
So you can see the best two options are to buy a long-term care policy or save especially for your potential long-term care needs. And the sooner you start, the better off you will be both on an insurance policy or by self-insuring by saving and investing the premiums.
If you need additional information or have questions, feel free to email me directly or leave a comment here.