Long-term care insurance can be an effective way to hedge against unexpected medical expenses in retirement. While this type of insurance isn’t for everyone, it’s worth considering if you’re concerned about rising healthcare costs depleting your retirement savings.
One of my primary roles as a financial advisor is helping my clients prepare for and thrive in retirement. In my experience, even the most diligent savers need validation that they can retire comfortably and on their own terms. Which is not surprising, since planning for an uncertain future is challenging, to say the least.
Contributing to this uncertainty is the fact that most of us don’t know what type of medical care we’ll need as we age. Healthcare tends to be one of the largest expenses in retirement, regardless of your overall health. Add to that the potential cost of long-term care, and medical expenses can quickly chip away at your savings if you’re not prepared. That’s why I believe a sound retirement strategy includes planning for long-term care.
What is Long-Term Care?
According to the National Institute on Aging, long-term care involves a variety of services that help people live as independently and safely as possible when they can no longer perform everyday activities on their own. In most cases, a family member or spouse ends up becoming the primary caregiver to someone who needs daily assistance with basic care. However, when this option isn’t available, long-term care can be very expensive. Why? Because traditional health insurance doesn’t cover long-term care, nor does Medicare.
For many people, an ongoing illness or disability triggers the need for long-term care. However, a sudden stroke, heart attack, or unexpected injury can cause an otherwise healthy person to need daily care, albeit temporarily. This distinction is important, since long-term care isn’t always long-term. Still, even a temporary setback in your health can be financially debilitating.
Long-Term Care Insurance
By the time you reach 65, you have a 50/50 chance of needing paid long-term care someday, according to AARP. And if you pay out of pocket, you’ll spend $140,000, on average.
If your net worth is substantial, you may be able to pay these expenses out of pocket. On the other hand, those with very few financial resources may be able to access Medicaid’s benefits. For everyone else, long-term care insurance may be a viable consideration.
Long-term care (LTC) insurance provides coverage for nursing home care, home care, and adult daycare for individuals age 65 or older. It also covers individuals with chronic or disabling conditions that require constant supervision.
The two main types of LTC policies are standalone and hybrid. Standalone policies are just that–traditional long-term care coverage. Hybrid policies combine long-term care coverage with either life insurance or a qualifying annuity.
Keep in mind, these are very simplistic descriptions of LTC insurance. Understanding the various types of insurance policies and their features is far more complex. As you’re planning for long-term care, you should consult with an insurance specialist or financial advisor to ensure you’re making the best decision for your future.
Qualifying for LTC Insurance
Unfortunately, even if you want and need LTC insurance, you may not qualify for it. Naturally, the healthier you are when you apply, the more options you’ll have available to you. However, a number of factors can disqualify you from even applying. While some of these reasons may seem obvious, some may surprise you.
Pre-existing conditions like Parkinson’s, multiple sclerosis, any dementia or progressive neurological condition such as Alzheimer’s, history of stroke, and metastatic cancer render you ineligible for LTC insurance. In addition, obesity, history of smoking, and some psychiatric illnesses are likely to make it more difficult for you to find coverage.
A 2016 study revealed some of the more surprising reasons people get turned down for long-term care insurance. Among them: you’re more likely to be turned down if you’re a teetotaler than if you consume alcohol. In addition, you may trigger a red flag if you’re significantly underweight.
Of course, these characteristics are often correlated with more serious conditions, which are more likely the cause for rejection. However, they illustrate how challenging it can be for the average person to obtain LTC insurance.
It’s important to note that premiums tend to rise as you age. If you’re in good health and eligible, the optimal age range to shop for long-term care insurance is between 57 and 65. And no matter when you buy LTC insurance, you should do your due diligence on the provider. Choosing a company that is financially strong with a long track record will help ensure you get the coverage you paid for when you need it.
Benefits and Drawbacks of LTC Insurance
In many cases, having insurance gives you more choices when it comes to your care. Plans are typically flexible, although most policies require a professional service to take place to be compensated for the cost. In other words, you’re unlikely to receive a payout if your caregiver is a family member or spouse, unless caregiving is also their profession.
In addition, long-term care insurance can help you preserve your assets in retirement if you end up needing extensive care. And if you purchase your policy when you’re relatively young and healthy, your premium stays the same, even if your health declines.
On the other hand, you run the risk of not needing long-term care until late in life–or at all. So if you purchase a policy early on to lock in a low premium, you could end up paying premiums for years without tapping into the benefits.
Furthermore, while LTC insurance offsets many of the costs associated with long-term care, it doesn’t cover all expenses. And, many long-term care policies have a maximum lifetime coverage amount, which means you could outspend or outlive the benefits.
Your decision to purchase LTC insurance is truly personal. Everyone must weigh the pros and cons in relation to their unique financial circumstances and family dynamics. Insurance can be a very helpful planning tool, but buying it is always a calculated risk.
When to Start Planning for Long-Term Care
I think a fear many of us share as we age is becoming a burden to our loved ones. Unfortunately, traditional health insurance and Medicare don’t provide for the fact that we may not be capable of living independently one day. That means long-term care isn’t just emotionally draining; it can be financially draining as well.
Planning for long-term care may feel overwhelming and unnecessary now. However, making arrangements for your future sooner rather than later can help protect you and your loved ones from potentially exorbitant medical expenses–and unneeded stress.
If you’d like to discuss your options for long-term care and whether LTC insurance may make sense within the context of your financial plan, we’d love to hear from you. In addition, we encourage you to download our free eBook, Retirement Advice for Independent Women, for more retirement planning considerations. Access your copy by subscribing below.