The medical definition of long-term care is “a facility that provides ongoing rehabilitative, restorative, and/or skilled nursing care to patients needing assistance with daily living activities.” When you’re enjoying your prime earning years, it’s hard to imagine that you would ever need assistance with daily life, nor is it something you probably want to think about. This could be why, even though most people eventually need it, and it’s a significant expense (a private nursing home room in Maine averages nearly $120,000/year), long-term care is the least planned-for retirement budget item.
The tendency to put it off could also be due to the highly individualized nature of long-term care needs. Because there is no one formula that will work for everyone, planning can be confusing. You and your neighbor may be similarly situated, but if your priorities and risk tolerances differ, you could be best off taking vastly different tacks.
But you both should have a plan. Without one, the burden of your care will typically fall to your closest family members, leaving them with some financially and emotionally difficult decisions.
Every long-term care plan should address how care is funded, who is handling it, and in what setting it will be provided. On the financial side, thinking about the following five factors will set you on your way to the right plan for you:
1. Your asset-protection needs
Most of us will pay for long-term care out of our own assets; so the question isn’t where the money will come from, but rather if you should protect some of your assets from the cost of long-term care by purchasing long-term care insurance.
On one end of the spectrum are the people who have sufficient funds to cover all of their own needs, including those of their spouse. At the other end are individuals who will quickly exhaust their assets paying for care and will need to rely on government welfare. Neither group typically needs long-term care insurance.
But for those who fall in the middle (for example, individuals with enough assets to cover the cost of one spouse’s long-term care but potentially insufficient funds for the other spouse’s retirement and/or care), securing coverage to protect some assets can be a prudent option. Even for those without a spouse, long-term care insurance can be worth considering, given that it mitigates the risk of having to self-fund some or all of your long-term care.
2. How you’ll feel about having paid for long-term care if you don’t need it
Even if you have assets that you’d like to protect from the cost of long-term care, you still may not end up using a long-term care policy. While about 70% of us will use some form of long-term care, that still leaves 30% who won’t. Furthermore, those who do use it may only do so for a short period of time. Traditional long-term care insurance is “use it or lose it”; so if you can’t tolerate the risk of not collecting any or all of a benefit after paying premiums for years, it may not be for you.
3. How much coverage you can qualify for and afford
If you do choose to pursue long-term care insurance, qualifying may present some hurdles. The long-term care insurance industry has suffered from past actuarial missteps, leading some insurance companies to leave the industry and others to increase premiums and more strictly enforce eligibility criteria. All of this has made it more difficult to find and qualify (based on medical records, family history, etc.) for coverage.
And it can be expensive. If you’re younger and in better health, you’ll secure lower premiums; but you’ll also pay them for a longer time period. Also, traditional long-term care insurance premiums aren’t fixed — so even if you do qualify for and purchase coverage, you’ll need to assume the risk of your premiums increasing over time (somewhat mitigating this risk is the notion that actuaries have had over 20 years to fix the mistakes of the past, the assumption being that they are now pricing the coverage properly).
4. Your ideal ratio of insurance benefits to out-of-pocket expenses
While it is possible in some cases to cover the entire cost of long-term care with insurance, it’s usually better to use this type of coverage as a supplement. Partially self-funding your long-term care expenses keeps premiums more affordable while also hedging against two outcomes most people would prefer to avoid: 1.) Fully funding a policy that you do not end up using, and 2.) Having to fully fund long-term care expenses out of your own assets.
5. Whether a non-traditional option makes financial sense
Individual vs. Couples Insurance – Many couples wonder whether it makes sense to obtain couples coverage or to choose one spouse to insure. Our advice is usually to at least cover the spouse who is likely to need care first, potentially protecting existing assets for the other spouse’s retirement and care.
Hybrid Policies – A fairly new option, hybrid life insurance/long-term care policies are a blend of both insurance types. Premiums in the form of contributions tend to be materially higher, but they are fixed, and those that you do not use are refunded. If you can afford to fund this coverage, however, you might consider instead simply investing an equivalent amount in a safe yielding security and using the interest to pay the premiums of a traditional long-term care policy. That way, your principal will not be consumed by your care, and you’ll still receive long-term care benefits.
While no one can fully predict their future long-term care needs, everyone can at least have a plan. Start yours by defining how you want your care to be funded, who should handle it, and in what setting you want it to happen. Be sure to discuss all of this with the people closest to you, and with your advisors at HM Payson. If you need help weighing your options or understanding the financial side, please reach out. As stewards of multi-generational wealth for 160+ years, we are here to help preserve your and your family’s financial assets, security, and well-being for the long term.