Planning for retirement is arguably one of the most important financial actions you will take in your life. The problem is that retirement planning involves a variety of factors and countless steps, which can overwhelm you and potentially lead to missed elements. One common planning gap is long-term care, with only 1 in 5 adults making any effort toward financing their future long-term care expenses. (1) Since an average 63% of today’s 65-year-olds will require some form of long-term care during their lifetimes, it’s important to have a plan to pay for these costs. (2)
November is long-term care awareness month, making it an ideal time to start thinking about your long-term care plan and researching your options. Here are some factors to think about when crafting your plan, as well as a few strategies to help you finance this piece of your retirement plan.
The Cost Of Long-Term Care
Long-term care costs are so high that they could potentially wipe out a bulk of your retirement funds. On average nationally, it costs $267 per day or $8,010 per month for a private room in a nursing home. (3) Furthermore, because of their longer life expectancy, women pay significantly more 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 $352,440 in expenses. (4) For men, who need long-term care for an average of 2.2 years (or around 26 months), that equals $208,260.
And costs are only projected to increase. In the past five years, long-term care expenses have jumped about 3%, with a big jump in prices from 2016-2017. (5) By 2026, the average cost is expected to increase to $4,876 per month for assisted living, (6) compared to $4,000 today. (7) 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.
Long-Term Care Options
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, you may want to look into facilities that offer the specific care you’ll need. Be sure to share your preferences with your family. Would you like to live in a nursing home or would you prefer nurses and assistants come to your residence? Do you want a religious community of care? There are several options to take into consideration when creating your long-term care plan.
Many people grieve the loss of independence and autonomy when their health suffers in the latter years of their life. Drafting up a long-term care plan now will give you some much-needed control over how you spend the rest of your life. If you wait until you need long-term care, 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.
Financing Your Long-Term Care Plan
Once you have an idea of what you want your long-term care to look like, it’s time to research ways to pay for it. 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.
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 Massachusetts will cost an average of $12,775 a month, and hiring a home health aide could set you back over $62,000 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.
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, 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.
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 variable annuity, you may have the alternative of adding a long-term care rider onto the contract. Since 2010, the IRS allows for the long-term care portion to be used tax-free.
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, 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 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 Now!
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. At Boston Metro Advisor, we strive to create effective strategies to your retirement challenges, optimizing every piece of your financial plan and giving you confidence in your financial future. If you have questions about your long-term care options and want to make sure you have the coverage you need, contact us for a complimentary consultation by calling (781) 995-0253 or email me directly at [email protected] today!
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material contains only general descriptions and is not a solicitation to sell any insurance product. For information about specific insurance needs or situations, contact your insurance agent.
Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.