Living Longer: The Importance of Planning for Long-Term Care
We know that good health is worth its weight in gold. But what happens when the cost of maintaining our health is more expensive than gold?
Covid-19 has taught us all not to take our health for granted. As you age through retirement, managing your health becomes even more essential and more costly. Technologies and solutions are being built to prolong life expectancies, but there’s a problem with this that hasn’t been solved yet: the financial impact of longer life expectancies paired with rising long-term care costs.
The Health and Retirement Study at the University of Michigan found that 33% of retirees don’t have the financial resources to cover minimal long-term care needs. With this, we’re going to cover why having a long-term care plan is important and go over several different ways to help reduce the financial burden.
Women Have a Different Set of Facts
Almost 70% of women age 75 or older are widowed, divorced or never married, compared to about 30% of older men who live alone, according to the AARP Public Policy Institute. This not only shows the importance of long-term care, but financial wellness overall.
Since women tend to outlive their partners, building a long-term care plan is just as important as planning for retirement. For many retirees, healthcare costs are their most significant expense and without proper planning, those costs can make for a stressful retirement. These costs are increasing – in California in 2020 the median annual cost for a long-term care facility was $137,240, a 7.43% increase from 2019.1
Planning for the Expense
Self-Insuring
Financial planning for long-term care can take different forms. The simplest option is to self-insure, which means having enough financial resources saved and invested to cover the cost of at-home care, a nursing home, or other long-term care facilities.
While self-insurance can be a valid option, it can be difficult to estimate expected costs. You’ll also need to understand your investment horizon, and create an asset allocation that can balance risk, income and growth, and is flexible enough to accommodate a potentially rapidly changing situation. If you are interested in taking this route, it may be helpful to work with an advisor who can analyze your assets and determine if it makes the most sense for your situation.
Long-Term Care Insurance
Long-term care insurance transfers the risk of health costs from you to the insurance company. These policies can be tailored to fit your needs and give you the ability to choose a sufficient level of coverage, which will be capped on a daily and a lifetime limit. You can also purchase policies with cost-of-living adjustments to protect against inflation, shorter elimination periods, and broader coverage.
When you make a claim, the insurance company will begin paying out benefits after the elimination period. The elimination period is the period between the claim and the benefits being paid out and you must pay for your own care before the insurance payouts begin. It’s important to have enough emergency savings to cover this period.
Life Insurance + Long-Term Care Rider
Outside of long-term care insurance, it may be possible to add a “long-term care rider” to a standard life insurance policy. A long-term care rider is an insurance feature that allows the insured to receive a portion of the death benefit while they’re still alive. This feature can be triggered by a diagnosis of a chronic illness and is generally only available on permanent life insurance policies. The added benefit can increase the monthly cost of life insurance, so it’s essential to review how this may fit into your budget.
Annuity + Long-Term Care Rider
Annuities can also have long-term care features built into them and operate similar to the life insurance example. You pay a single lump-sum premium and the insurance company issues monthly payments to the insured outlined in the policy. If needed, you can access a portion of the funds immediately for long-term care expenses and the rest can be accessed in accordance with the policy’s guidelines.
Hybrid Asset-Based policy
As an alternative to self-insurance, a hybrid asset-based policy lets you deposit an initial lump sum (or make guaranteed payments), providing you with an immediate amount of long-term care coverage. For those concerned about losing money to paying the premiums on most plans, hybrid plans can pay you or your loved ones back if the funds are never used.
Health Savings Account
One way to reduce the impact of long-term care costs is to take advantage of a Health Savings Account (HSA). HSAs are unique and powerful due to their tax treatment. When you contribute funds you will receive a tax deduction, the funds can grow tax-free, and when used for qualified medical expenses, you can also withdraw the money tax-free. This creates a triple tax advantage.
The Family Solution
While being cared for by people that love you would be the best option, it’s often just not possible. Children are busy with careers and children of their own and uprooting your life to move closer to them – while offering many other benefits – would require creating a new life. It can also create tension in families when one child is the primary caregiver.
The Takeaway
Long-term care is costly and these expenses will likely increase. This creates a need for forward-thinking and proactive planning. At Refresh Investments, the long-term care plan is a vital element in all our client’s financial plans. We want our clients to be informed of what to expect with the cost of care and not be caught off guard. It’s never too early to plan for the future. The best way to stay ahead of the curve is to have a strategy in place that is adaptable to your changing financial life.
1. Genworth. Cost of Care Survey 2020. February 12, 2021. Genworth.
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