A critical component of successful retirement planning is ensuring access to affordable long-term care. With the costs of health care skyrocketing and life expectancies increasing, prudent planning is key in managing your finances deep into retirement. In this article, we hope to familiarize you with the basic components of long-term care and the financial strategies necessary to prepare and pay for it.
What is long-term care?
Long-term care arises when someone requires assistance completing daily activities for an extended period of time, typically due to a medical condition or illness. These daily activities can range from help preparing meals and taking medication to financial services and pet care.
Generally, these tasks are broken down into two major categories, ADL (Activities of Daily Living) and IADL (Instrumental Activities of Daily Living). ADL covers assistance that is necessary for daily life such as taking a bath, getting dressed, and providing meals. IADL includes other essential help with shopping, cleaning, and medication.
This assistance can be provided in a variety of settings. Nursing homes, at home care, and assisted living facilities are all considered types of long-term care. Just because someone continues to live in their own home, doesn’t mean they can’t or don’t receive long-term care.
Will I need long-term care?
Regrettably, no one avoids the aging process, and with it, the potential need to access long-term care services. Recent research suggests the lifetime probability of requiring long-term care for people age 65 and older is upwards of 68%.
As with many health conditions, this risk increases as you age. While your risk at 65 might be relatively low, by the age of 90 nearly three quarters of people require some sort of long-term care. While there is no standard age, the older you are, the higher your likelihood of needing this type of care. The risk is particularly increased for women due to their higher life expectancies.
Additionally, a variety of ailments could require long-term care, so even if you are healthy, accidents often necessitate assistance with daily activities. In short, it’s simply impossible to predict if or when someone will require long-term care, but as you age, the chances will inevitably increase.
Long-term care options
It is important to remember that long-term care encompasses a wide variety of care options beyond the standard nursing home and assisted living facility experience. In-home care has become an increasingly popular alternative, and many full-time facilities offer a rich social life built on community activities and excursions.
When planning for long-term care, understanding the choices is critical. While facilities differ in supervision and comfort, they can be broken down into three main categories.
One of the most popular avenues for senior care is the traditional nursing home. Residents often require heightened attention from professional medical staff and more supervision than their assisted living facility counterparts. These facilities are a good fit for people needing more intensive care.
If you or a loved one want a more residential environment while still benefiting from some of the resources of a nursing home, assisted living facilities are a great option. These provide you with a comfortable combination of supervision and independence, typically in apartment style living. You have all the support you need but also a higher level of privacy.
At home care
If you don’t want to leave the comfort of your home, hiring an in-home nurse or caregiver is an option to consider. Most nurses or caregivers charge by the hour and can perform a variety of tasks ranging from help administering medication to preparing meals. Additionally, in-home care is often less expensive than traditional methods of long-term care.
Long-term care costs
Put simply, long -term care is expensive, and unfortunately, the cost has dramatically increased in recent years. Average annual nursing home costs amount to nearly $90,000, and at home care, typically costing around $20 an hour, can quickly add up to tens of thousands of dollars. Adult day care centers average $60 per day, and assisted living facilities often cost upwards of $3,500 per month.
The cost is also dependent on your area. For instance, if you live in California or New York, assisted living facilities average around $4,000 per month; however, in Nevada or Texas, these costs are around $3,000.
Because of the hefty price tag, smart planning is necessary in affording long-term care.
Paying for long-term care
There are many financial strategies to weigh when deciding how to pay for long-term care. Most important, however, is making intelligent preparations early. To assist in this process we have highlighted some of the best ways to pay for long-term care, particularly for individuals and couples who are already retired.
Long-term care insurance and shared rider policies
One of the best options is to obtain a long-term care insurance policy. These policies range in protection but cover anywhere from some to all of your long-term care costs and typically have a predetermined total payout.
When researching long-term care insurance, there are two main points to consider. First, premiums rise dramatically as you age. For example, a 60 year old couple that pays $3,930 for a policy would pay $6,177 at age 65. If you think an insurance policy is right for you, it makes sense to choose a policy early in retirement.
Second, long-term care insurance is expensive. If you are afraid you will not be able to keep paying the premiums, other options might make more sense. This is particularly important because lapsing on your policy will result in its termination- and you won’t get any of your money back.
Another insurance option to consider is a “shared rider” policy. Shared care riders allow couples to “share” benefits. For example, a husband who develops Parkinson’s disease requiring long-term care for the entirety of his benefit period can use money from the spouse’s benefit to help pay for his long-term care.
Additionally, it is smart to investigate combination long-term care/ life insurance. These supplement Medicare and Social Security in helping to pay for long-term care. If a spouse dies before they exhaust the benefit, the remainder is paid out to the other.
Many people don’t realize they can sell their life insurance policies for cash, often for much more than the surrender value. Life insurance is a piece of property, much like your home, and you can sell it through a process known as a life settlement. In this transaction, the life insurance policyholder sells their policy to the buyer, known as a provider. The provider then continues to pay the premiums on the policy.
This benefits the policyholder in two ways. First, they receive money immediately that can help pay for long-term care or any other expense. Second, the policyholder no longer has to worry about premiums.
Surprisingly, many people allow their policies to lapse because they are unaware of this option. Annually, 250,000 policyholders lapse on their payments, missing out on an average of $51,300 each. Find out what your policy is worth here.
For many in retirement, their most valuable asset is their home. One way to take advantage of this would be a reverse mortgage, a loan where you transition the equity of your home to cash.
The loan is paid to you either in increments or as a lump sum and can be used to pay off your current home mortgage or to cover long-term care costs. The amount of the loan depends on your age, home value, and interest rates. When the loan is due, your heirs can either pay it off independently or sell the home, with any remaining money from the sale returning to the family.
Even better, HECM reverse mortgages are insured by the Federal Housing Authority. Reverse mortgages make sense for certain people, but if you want your heirs to inherit your home or if you plan on relocating, you might want to consider a different option. Moreover, reverse mortgages still require the homeowner to pay property taxes and homeowner’s insurance.
For a more structured financial strategy, you should consider annuities. Once purchased, the insurance company pays you a monthly income based on the initial purchase price. When planning for long-term care, there are two main types of annuities to choose from.
The first type, an immediate annuity, is a series of payments to you from the insurance company. What’s great about immediate annuities is that everyone qualifies, regardless of age or health status.
The second option is a deferred long-term care annuity. This annuity creates two separate funds. The first fund is dedicated to long-term care needs and the second can be used for other expenses, including long-term care. You again receive monthly income, but have limited access to both funds. Unfortunately, deferred long-term care annuities are only available to people under 85.
Annuities are a great method for long-term care planning, but, as with the strategies above, are not for everyone. For example, annuities might not cover all of your long-term care expenses. Additionally, annuities are taxed depending on multiple variables, including how they were purchased and your life expectancy, making the process complicated. However, they are a potentially useful component of a long-term care planning strategy that should be investigated.
Government assistance- medicare and medicaid
Unfortunately for most retirees, Medicare and Medicaid do not provide sufficient coverage for long-term care. Many people rely on government assistance to help pay for their medical care but are unaware of how little these programs actually cover. For example, Medicare only provides nursing home services for up to 100 days and only for individuals who meet certain criteria. Medicaid only covers long-term care for individuals below a certain income level.
Social Security alone is not enough to pay for long-term care, especially given the upward trend in long-term care costs. Some veterans may be eligible for other government programs, but even the combination often falls short. This makes proper long-term care planning incredibly crucial.
Planning tips for long-term care
- Do Your Homework: We hope that the information provided above serves as an inspiration to investigate long-term care options that are right for you and your family.
- Buy Early: As mentioned above, it is paramount you start planning for long-term care costs early, particularly if you decide to purchase long-term care insurance.
- Research Your Options: Hopefully, you will never require long-term care, but to be safe, it is necessary to understand your options whether it’s in-home care or an assisted living facility.
- Understand Government Assistance Is Not Sufficient: Regrettably, Medicare and Social Security likely do not provide the coverage you need to afford long-term care, making alternative options even more important.
- It’s Not Too Late!: No matter what stage of retirement you are in, there are still steps you can take to manage the expense of long-term care.