Most people will need long-term care (LTC) and a plan to cover what can be unpredictable and potentially large costs so that you avoid burdening — financially and emotionally — your family and caregivers.
Paying for LTC requires thought, research, and planning. You’ll want to start early, and the reality is that once you’re older than 70, some options may not be available. It’s a good idea to work with a financial adviser before making a decision and what could be a very expensive mistake. Whatever plan you devise should be communicated to your health proxy or durable power of attorney to implement when you’ll most likely be unable to.
What Is LTC?
LTC isn’t medical care, which Medicare and health insurance plans generally cover. LTC comprises assistance — in the form of care or service provided — with the basic personal tasks of everyday life or, for purposes of insurance coverage, activities of daily living (ADLs). LTC providers assist people with these six ADLs.
- Transferring from sitting to standing, out of bed, etc.
- Personal hygiene such as bathing, grooming, and brushing teeth
- Help getting to and from the restroom, using the restroom, and cleaning yourself afterward
Who Needs LTC?
According to LongTermCare.gov, 70% of individuals over 65 will require some sort of LTC. You can figure on needing full-time LTC for an average of three years. In the U.S., men, on average, need it for 2.2 years and women, for 3.7 years.
How Much Does LTC Cost?
LTC costs vary widely and depend on where you live and the amount and type of care needed.
Regional Cost Differences: The cost of LTC is regionally dependent, with some regions being more expensive than others. Using the Genworth cost of care calculator, the average annual cost of a private room in a nursing home in California is $146K and $72K in Texas. Know and plan for the average cost in your area.
Amount of Care: Care needs increase as health declines. Care often initially starts with an unpaid family member helping for a few hours a week. (According to acl.gov, unpaid caregivers currently provide 80% of LTC.) When family members can no longer provide enough care, they generally hire caregivers a few times a week. The need will usually increase over time to full-time care, and then you’ll have to decide between bringing in full-time, skilled home care or moving to an assisted living or nursing home facility.
Types of Care: LTC options are expensive, and costs are rising faster than inflation. There are a variety of types of care from adult day care to in-home help. Genworth’s cost of care calculator shows the 2021 United States average annual median costs for a range of care options from adult day care at $20K to a nursing home private room at $108K to in-home, around-the-clock care at $235K. Remember, these costs are annual and LTC care averages 3 years.
Who Covers LTC Costs?
People may think that Medicare covers these costs, however, it doesn’t. You’re responsible for figuring it out.
Retirement Savings and Disbursements: You can use the money you saved pre-tax for your retirement or disbursements from your pension and social security.
Pros – It’s a liquid asset.
Cons – Going this route can quickly drain your savings. It’s tax inefficient as you’ll pay capital gains and LTC costs simultaneously.
Healthcare Savings Account (HSA): You can use the pre-tax money saved in an HSA. HSAs are tax-sheltered savings that use pre-tax earnings, grow tax-free, and can be used for medical and long-term care expenses without paying tax on the gains.
Pros – Great tax advantages. Money is segregated for easy identification and use.
Cons – Requires advanced planning. You need to start saving with HSAs well before you retire. The maximum annual contribution is $7,200 per couple, not nearly enough to cover the anticipated LTC costs.
Reverse Mortgage: A reverse mortgage loan allows a homeowner who’s 62 or older and has home equity to borrow against the value of their home. The loan becomes due and payable when the borrower dies, moves out permanently, or sells the home.
Pros – The loan can be used for any expenses, including long-term care. The proceeds are not taxable. You pay the loan back when the house is sold.
Cons – You must live in the home. These mortgages have high closing costs, are complex, and can be expensive. Do your research, as there have been reports of predatory lending.
Home Equity Loan or Line of Credit: Like a reverse mortgage, home equity loans or lines of credit allow homeowners to borrow against the equity in their homes.
Pros – There’s no age requirement. You don’t need to live in the home. The proceeds are not taxable.
Cons – Like any mortgage, you need to start repaying for the loan 30-days after closing, meaning you will use the loan proceeds for both LTC and mortgage costs. Repayment is not tax-deductible.
LTC Insurance: LTC insurance pays or reimburses covered LTC costs. You apply for LTC insurance when you are insurable and then you pay premiums until you can no longer do 2 of the 6 ADLs. Some 30% of people will never need their coverage. LTC insurance has a daily cost limit based on what you purchased and may not cover all your LTC expenses. According to the American Association for LTC, in 2022, a couple both aged 65 can expect to pay $3,750 for $165,000 in total coverage for each of them.
Pros – This coverage is for LTC. Your family knows where to access the insurance and will not need to decide which assets to liquidate.
Cons – There’s a 90-day waiting period (called an elimination period) where you’re responsible for 100% of the costs. If you delay purchasing, you can be denied coverage, and many people are. Premiums are expensive and typically increase over time. If you don’t use it, you lose it. The number of insurance companies providing LTC insurance is dwindling, and choices are limited.
If you can’t qualify for LTC insurance, short-term care insurance provides $200/day coverage for one year. You can find more info here.
Hybrid Life Insurance: Hybrid life insurance combines life insurance and LTC insurance, and your policy will pay out in full either when you need the LTC or when you die. Like LTC insurance, you apply when you are healthy and insurable. The premiums are a function of your age, health, and desired amount of coverage and do not increase over time. If you can no longer do 2 of 6 ADLs, the policy will cover LTC expenses up to the full-coverage amount you purchased. When you die, any unused coverage portion is paid out as a death benefit.
Pros: No waiting period.The death benefit is tax-free to beneficiaries. These policies come with a care coordination provider. Your caregiver knows where to access the insurance and will not need to decide which assets to liquidate.
Cons: If you wait too long to purchase, you can be denied coverage, and many people are. Your coverage is limited to your policy amount, and your LTC costs could exceed.
- Viatical Settlements — If you have an existing life insurance policy, you may get LTC coverage through viatical settlements, life settlements, or accelerated death benefits. These options are selling your policy for cash value or a percentage of the death benefits. Call your life insurance company for more details.
- Annuities and Trusts — There are other complex financial instruments, such as annuities and trusts, that you can discuss with your financial adviser.
- Government Assistance — You may qualify for government assistance. Visit benefits.gov to find out. Here is a list of programs for which you may qualify:
- Medicaid (Only adults with little or no assets and very low household income levels)
- Program of All-Inclusive Care for the Elderly (PACE)
- State Health Insurance Assistance Program (SHIP)
- Department of Veterans Affairs
- Social Security Administration Programs (such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)
Now is the time to prepare for these expenses.
Throughout the “The Nuts and Bolts” section of this blog, we will introduce you to the ins and outs of these insurance plans as well as other practical needs in retirement.