By Mary Harris, CFP®
A good retirement plan gives you a snapshot of your current situation along with multiple “what-if” future scenarios. Your plan is not complete until you factor in the great unknown – the future cost of a long-term care event for you or a loved one.
Nearly 60% of people age 65 or older are expected to need some long-term care services in the future—and it has the potential to take a big bite out of your retirement savings.1 This is where personal planning and perhaps long-term care insurance come in to help you prepare for the unexpected. Like any financial instrument, long-term care (LTC) insurance isn’t for everyone and getting the most from it will depend on your situation. Here’s a rundown of things you need to know.
Essentially, long-term care insurance involves using funds today to protect against the potential future cost of care, should you become physically or cognitively impaired and require extended support or services.
Long-term care insurance is a contract between you and an insurance company. In exchange for premiums you pay today, the insurance company agrees to cover long-term care costs either at home, in various assisted living arrangements or in a nursing home for a set period of time with predetermined daily or monthly benefits.
You may have a solid cash flow plan for retirement, but a vital element of any strategy includes risk management. The purpose of long-term care insurance is to safeguard your retirement income and savings against potential long-term care costs. Think of LTC insurance as TLC for your financial plan or a preservation component of a well-built retirement nest egg. Of course, there’s cost involved and you’re taking money out of your pocket now for a future risk that may never come into play. Determining if LTC coverage is right for you requires consumer education and a thorough review of your personal health and financial status.
“The first wealth is health,” according to philosopher Ralph Waldo Emerson, and insurance companies tend to agree. Your medical history and state of health will play a big role in determining how much you’ll pay for coverage. Maintaining a healthy lifestyle can benefit your bottom-line now and during retirement years, by keeping down not only healthcare costs, but also insurance premiums.
Like most things in life—timing is everything. Most long-term care insurance is purchased between ages 50 – 65 years of age, as premiums are based on your age when your policy is first issued and your health status at that time. If there is a need for long-term care, it typically happens several decades later, around age 80 and beyond. Be proactive and start planning for long-term care well before the need for it arrives. Once health problems arise, new coverage will be much more expensive, if not unobtainable.
While reviewing LTC coverage options, research the average cost of care in your area to get an idea of what expenses could look like. A good resource to begin to understand the shockingly high cost of care is Genworth’s 2017 Cost of Care data at genworth.com. You’ll be able to compare your city and state to other areas across the country for various types of care, such as home healthcare, assisted living facilities and nursing homes.
It’s also important to compare the core parts of each policy, such as the daily benefit, inflation adjustment, elimination and benefit periods, and general care benefits. Ensure that you understand all of the benefits you’ll receive and any gaps that you may need to fill with personal savings. If you’re married, you may want to explore the pros and cons of obtaining a shared policy.
A LTC policy should be considered as an important piece of your insurance and healthcare planning puzzle, which should in turn factor into your broader financial plan. Many fall prey to common misconceptions around long-term care coverage in retirement due to the complexity of Medicare and the belief that Medicare will pay for long-term care costs. It does not. You can’t reduce risk to zero, but you can be well-informed about the choices and trade-offs you’re willing to make with your healthcare insurance dollars.
Clearly, there are a myriad of factors to consider when evaluating long-term care insurance. It’s important to closely review your personal situation to see if the premiums and inevitable future rate increases are a realistic fit for you financially. Some decide to forego this insurance altogether and “self-insure” this risk while others decide to “hedge” and insure only a portion of the risk. We help our clients assess all the factors at play and walk them through the decision-making process. If you already have a long-term care policy, review it with your trusted advisor to ensure the premiums are built into your retirement plan and that you and your family are well-protected.
1 U.S. Department of Health and Human Services. The Basics of Long-Term Care. https://longtermcare.acl.gov/the-basics/index.html. Accessed March 29, 2018.