A decision that is bigger than budgets and more about family
by Dennis Ho, FSA, CFA®Mr. Ho is Co-Founder and CEO of Saturday Insurance, a national, online insurance advisory. Visit here for more details.
April 6, 2020 — In simple terms, long-term care insurance is about paying for assisted living or nursing home care as you age or in the event of a chronic condition or disability. Deciding whether it makes sense for you can seem like a basic math equation. All you need to do is weigh the probability you’ll require long-term care against the coverage costs and your savings, right?
Before you dig into costs, benefits and contingency plans, step back and look at the big picture. This decision is bigger than budgets and life-expectancy tables. It’s about your family and your wishes for them as well as yourself.
Crunching the numbers is important, but deciding you need long-term care insurance – or you don’t – is rarely just a calculation of risk vs. costs. To make the right decision, it’s important to also weigh factors beyond dollars and cents. Consider the following reasons as you assess your coverage needs.
Reason 1: I don’t want my care to become a burden to my family
The reality is 70 percent of us will need some type of long-term care after age 65. The level of care ranges from in-home assistance to assisted living facilities to nursing home care. On average, people need long-term care for three years, with women needing care an average of 3.7 years, compared with men who average 2.2 years. One in five people needs long-term care for five or more years.
Most of us want to stay in our homes as we age. But doing so can put a strain on our caregivers. Today, 80 percent of care in the home is provided by unpaid caregivers, usually family members, who spend an average of 20 hours per week providing care. Two-thirds are women, with many also balancing a job and childcare responsibilities. Along with emotional strain, there’s also a financial impact. It’s estimated caregivers lose an average of $303,880 in wages and benefits over their lifetime.
When considering whether to purchase long-term care insurance, evaluate your personal situation and how it could change as you age. Think about what you would like to happen in terms of care and what is realistic. Most importantly, think about the impact to your caregivers. As you need more help with the activities of daily living, such as dressing, bathing and movement, will you – and your spouse or family member – be comfortable managing the care required.
It’s essential to have honest conversations with your loved ones about what you want and what makes sense. It’s also important to revisit these conversations from time to time, as circumstances change.
One of my clients, an Army veteran in his 60s, had his retirement all mapped out. Then, his wife of 30 years unexpectedly filed for divorce. The divorce shattered him and his plans. As he picked up the pieces and faced his new future, he decided to purchase long-term care insurance for added peace of mind.
Reason 2: I want to ensure I save what I’ll need for retirement – and protect my hard-earned assets
Many people plan to rely on their retirement savings to cover the costs of long-term care. But it can be difficult to determine how much savings you’ll need.
Sixty-three percent of people don’t have any out-of-pocket long-term care expenses in their lifetime due to a combination of unpaid caregivers, insurance coverages and Medicare or Medicaid benefits. However, when you do need long-term care, it can be expensive. The costs vary significantly across the country, but the median annual cost for assisted living care is $48,612. The cost of nursing home care is more than double that, with the nationwide median at $102,200 per year. The median annual cost for home health aides is in the middle at $52,624.
A couple I work with are planning their retirement. The husband is 61, and the wife is 57. They’re at the point where they’re figuring out more of the specifics, such as how much money they need to live on and when they will start drawing on their retirement savings. One of their biggest concerns is what would happen if one of them had a significant health crisis, requiring extensive care that would eat up the substantial nest egg they spent their lifetime building, leaving the other spouse with much less to live on in retirement.
It’s a valid concern. When comparing the costs of different scenarios, you’ll also want to consider how much, if any, of the costs would be covered by Medicare or Medicaid. Medicare will cover long-term care – such as rehabilitation after an injury or illness – for up to 100 days following a hospital stay. It’s not a viable option if you need permanent, ongoing care.
Medicaid will pay for long-term care if you meet two types of eligibility requirements. The first is functional, meaning you must require the level of care provided by a nursing home or intermediate care facility. The second is financial. To qualify, you must meet your state’s income guidelines. Typically, qualifying requires you to deplete your savings and assets significantly.
For many, who want to preserve savings and assets for their spouse, heirs or causes, long-term care insurance can be an important element within an overall financial plan. Recently, a 71-year-old client whose husband died 18 months ago decided to purchase long-term care insurance because she was worried her care could eat up all her remaining assets, and she wanted to be able to leave something for her daughter.
Reason 3: I want to ensure I have choices when it comes to my care
Even though it’s not something we like to think about, most of us have a clear idea of the type of care we’d like as we grow older. Planning for long-term care starts with making your preferences known and creating a financial plan to achieve them.
While Medicaid provides a safety net once your savings are depleted, its primary focus is on nursing home care. Depending on your state, Medicaid doesn’t always cover home-based care or assisted living options. When it comes to nursing home care, it’s not always easy to find a bed as a Medicaid resident. Even though up to 90 percent of nursing homes accept Medicaid, the percentage can be misleading. Nursing homes may only take a set number of Medicaid residents, so your choice of facilities may be limited.
Long-term care insurance can help ensure you’re able to pay for the level of care you need and want. One solution may be to supplement your savings with insurance. Here’s a process to determine how much, if any, long-term care insurance you might need.
First, determine the cost of care in your area. Genworth Financial’s cost of care calculator is a helpful resource.
Assess your financial resources to cover the costs of long-term care. Do you have assets or pension income that could be used to pay for care if needed? How much could you afford to pay per month? For how long?
Identify your coverage gap. If, based on your savings, you’re comfortable spending $2,000 per month for two years and the estimated cost of care in your area is $6,000 per month, a long- term care policy with a $4,000 per month benefit can help fill in the gap.
If you decide long-term care insurance makes sense, determine how much you can realistically afford to spend on premiums and continue to pay over time. The first priority is saving for your retirement. If you’re age 65 and you have less than $250,000 to $300,000 saved for retirement, focus on building your savings before adding long-term care insurance premiums to your budget. You’ll also want to explore the range of different policies available, including “traditional” and “hybrid life/long-term care” policies, which are the most popular.
The decision to purchase long-term care insurance is highly personal based on both financial and emotional reasons. Once you’ve made the decision, the next step is choosing the right coverage to match your needs. In a future article, I’ll explore the ins and outs of selecting a policy type, the coverage amount, and which features to consider including.
Mr. Ho is co-founder and chief executive of Saturday Insurance, an online independent insurance agency. With over 20 years of industry experience, Dennis has a passion for insurance and the role that it can play in building financial security. Dennis is a Fellow of the Society of Actuaries and a CFA Charterholder. Originally from Winnipeg, Canada, Dennis now resides in New Jersey with his wife and three young children.