Published by Christina Hester Snyder, Partner and Wealth Advisor
Gambling may be all fun and games when you’re in Las Vegas, but in the real world, there are certain things you never want to risk; your retirement savings, your kids, and your long-term health are just a few. While most of us understand the importance of saving for retirement and taking care of our children, few Americans incorporate the possibility of long-term care (LTC) into their overall financial plans. This is understandable because it’s easy to focus on building your savings and not worry about future healthcare needs when you’re healthy and thriving.
However, research shows that nearly 70% of today’s 65-year-olds are going to need some form of LTC. Regardless of what your health looks like today, creating a LTC plan now will allow you to be prepared and build a plan that works for you and your family—saving time, money, and stress in the future. This guide will help you learn more about your options so you can retire with confidence.
How Much Does Long-Term Care Cost?
The unfortunate reality is that LTC costs are so high that they could potentially wipe out a bulk of your retirement funds. In 2022, the national average cost for a nursing home is about $8,000 per month for a semi-private room and $9,300 for a private room! To make matters worse, women often pay significantly more than men for LTC because of their longer life expectancy. Women usually require LTC for 3.7 years (or around 44 months), versus 2.2 years (or around 26 months) for men. When the costs are added up, women will spend around $409,200 and men will spend $241,800 on LTC alone.
And this amount is only projected to increase. By 2032, the cost for a private room in a nursing home is expected to jump to $12,505 per month, and assisted living will reach $6,229 per month, compared to $4,500 today. These costs can vary dramatically based on the level of care and amenities required, as well as the size of the room, and your geographic location. The first step in planning for LTC is to decide what type of care you would 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, consider facilities that offer the specific care you’ll need. Be sure to share your thoughts with your family, so that everyone is aware of your wishes. Would you prefer to live in a nursing home, or would you like nurses and assistants to come to your residence? Or do you want a religious community of care? There are several preferences to consider when building your LTC plan.
Having the option to make these choices yourself lends much-needed autonomy to your LTC plan. If you wait until you need it, you may not be mentally or physically capable of making the decision yourself, 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 LTC insurance options available to you and whether or not a policy makes sense for your lifestyle and needs. Planning ahead can also help to alleviate any burden on your kids if your health declines more rapidly than expected.
Your Long-Term Care Plan
LTC coverage isn’t cheap, but it pales in comparison to LTC costs. Here are some options to consider when creating your LTC strategy.
1. Traditional Long-Term Care Insurance
With traditional long-term care insurance, you pay a premium in exchange for LTC coverage if/when it is needed. If you need LTC at some point, the policy provides you with money to pay for it. If, on the other hand, you never need LTC, you will receive no benefits. Much like a term life insurance contract, it is typically a “use it or lose it” policy.
As with other insurance policies, 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. Most policies also include home-care coverage as that type of care is usually less expensive for the insurance company. 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 Maryland costs an average of $12,532 per month, while that same room costs $10,307 per month in Nevada.
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, but you won’t get the tax benefits that come from a qualified plan.
Inflation and Premiums
If you want, you can have your benefits increase with inflation to match future care costs by adding an inflation rider. Keep in mind that premiums for any LTC policy are not set in stone and can rise over time based on increases in LTC prices, presuming the insurance company is successful in getting the state to approve the rate increase.
2. Life Insurance With a Long-Term Care Rider
The use-it-or-lose-it nature of a traditional LTC policy can sometimes feel like a waste if you don’t end up needing LTC benefits. Because of this, several hybrid products have emerged. One very popular solution is a life insurance policy with a LTC rider. This strategy is enticing because if LTC 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), and thus no money is wasted.
If you need life insurance, adding LTC coverage as a rider may be a good option for you. This way, someone will benefit from the premiums you pay, whether it is in the form of LTC benefits or death benefits. Depending on the type of life policy purchased, it may also accumulate a cash value, meaning the insured individual can access it if needed, allowing them to recoup a portion or all of their premiums paid if the coverage is no longer desired.
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 option of adding a LTC rider onto the contract. Since 2010, the IRS allows for the LTC portion to be used tax-free.
After purchasing the annuity, you would select the amount of LTC 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 LTC. Otherwise, you can cash out the annuity when it matures (at which point you would lose your LTC coverage) or let it accumulate and ultimately pass on as an asset to your heirs.
Obtaining LTC 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 cash payment.
4. Partially or Fully Self-Insure
Another option to consider is partially or fully self-insuring. With this strategy, you would simply create a savings or investment plan specifically for future healthcare needs. This can be done with any number of strategies. By contributing a specific amount every month, you can build a contingency fund for whatever healthcare expenses come your way. If you end up not needing LTC, the money is still yours and can be used for your living costs, unexpected expenses, or an inheritance for your heirs.
This can be an effective option for clients who are in good health with no major concerns in their family medical history and expect to need little to no serious LTC in the future but still want to be protected in the event of unexpected healthcare needs. Just remember that a need for long-term care can be totally unexpected and occur at any time, regardless of age, so planning to self-insure can put you at risk of not having the funds when needed.
Start Planning Today
Whether you are nearing retirement or have already reached that stage of life, it’s not too late to start planning. LTC is just one aspect of planning for retirement, but it’s an important part of the process. We understand it can be stressful or confusing, but that’s why our team at Jacob William Advisory is here to help you navigate your options using our comprehensive financial planning services.
If you have questions about LTC or want to make sure you have the coverage you need, contact our office by calling 410-821-6724, emailing [email protected], or schedule an appointment at https://www.jacobwilliam.com/insights/#contact. You can also take the retirement readiness quiz or download one of our free guides for more information: https://www.jacobwilliam.com/insights/free-guides/.
About Christina Hester Snyder
Christina is a Partner and Wealth Advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.