If you are an investor approaching retirement and haven't already, you should consider the potential cost of long-term healthcare and factor it into your financial plans. The reality is that most Americans over the age of 65 will likely require some type of at-home or inpatient long-term care (LTC) as they age. For many, the cost of that care can end up as an out-of-pocket expense with the potential to wipe out years of retirement savings. One way to try and ensure you can maintain a certain lifestyle into your twilight years is to take steps now to protect yourself, so the cost of LTC does not derail those plans. We discuss LTC below and offer recommended strategies that may help you offset that risk.
General Information about Long-Term Care and Estimated Costs
When someone requires LTC, it means they have reached a point at which they need help to accomplish the activities of daily living, or ADLs, which are defined as eating, bathing, dressing, using a restroom, and walking independently. Adults at this stage usually require in-home help or placement in an assisted living or nursing home facility. While the need for LTC is a difficult topic to address with family members, it is also inevitable. As this specific kind of care remains a large gap in the American social safety net, it is one of the most important discussions a family can have.
"Typically, LTC services are not covered through regular health insurance plans and can cost upwards of $200,000 per year depending on where you reside and your circumstances. The average cost of a nursing home per annum runs about $80,000-$100,000; an assisted living facility can cost an average of $52,000 per year," says JJ Feldman, a Los Angeles-based financial advisor for B. Riley Wealth Management.
"The mistake that many investors make is assuming that Medicare covers these expenses, but it does not. Rather, it only covers short nursing home stays or limited rehabilitative home care after a major event, so it is important to plan for the future and consider ways in which they can supplement their already existing plans," Feldman adds.
Feldman also advises that Medicare should also not be confused with Medicaid, which covers LTC expenses for people with less than $30,000 in total assets, so it would not apply until an investor has exhausted most of his or her resources.
Long Term Care Insurance Plans
The purchase of a LTC plan can provide investors peace-of-mind in knowing their nest egg will not be depleted, and their family members will not be burdened with the cost of caring for them. LTC plans typically kick in after a waiting period of 30 to 90 days, when it has been confirmed that an adult can no longer perform two of the aforementioned activities of daily living or are suffering from severe cognitive impairment. A traditional LTC insurance plan would likely cover about half of the cost for about three years, depending on the circumstances.
No matter where you need to stay, a basic long term plan will ensure that at least a portion of your expenses are covered. A 60-year old married couple should expect to pay around $3,000 per year in premiums for such a plan. Some investors opt for inflation riders that increase benefits over time as the cost of healthcare increases. "Older, married couples, where only one spouse needs LTC, often prefer to have a home health aide, if possible, and that is also covered as a benefit," Feldman adds.
Hybrid plans, or plans that combine LTC and life insurance, are sometimes purchased by investors who may not qualify for a traditional LTC plan due to certain health issues. Life and LTC insurance plans are combined, and investors can access the death benefit portion of the life plan to pay for LTC. Premiums for these plans are fixed for life, and beneficiaries would receive the full payout of the plan if the LTC option was not used.
Hybrid plans are far more expensive than regular LTC plans, and in taking on a hybrid plan, investors are purchasing insurance that may never be needed, but the plans can be useful. "A hybrid policy requires a large, single premium payment of $75,000-$125,000, which is more than a lifetime of premium payments on a traditional LTC policy. However, the upside is that there is a guaranteed return of the funds to a beneficiary or heir if the policy owner does not need the benefits. If the benefits are needed, they can be three to eight times the amount of the lump sum premium that was initially paid, and are tax-free," says Bob McCommon, who directs annuity sales at B. Riley Wealth Management in Memphis.
"It is also worth mentioning that a life insurance policy can provide for LTC benefits through an optional rider. If needed, advances of the relatively large death benefit to the insured are paid in monthly installments, tax-free. Premiums would be scheduled at a guaranteed amount over a guaranteed time period. As a result of this type of coverage, a tax-free benefit is provided to either the insured for LTC, or to the policy beneficiaries at death, McCommon adds.
Items to Consider When Looking for a Long-Term Care Plan
Every investor should make sure they ask the right questions of their financial advisor and insurance broker when considering the purchase of a LTC insurance plan. Confirm exactly which circumstances trigger policy benefits. Find out what is considered an activity of daily living under each plan, how a shared plan would work if you are married and both spouses need this kind of care, and whether premiums are constant or increase over time due to inflation. Discern the length of the waiting period before benefits kick in, whether you need an inflation rider, and most importantly, how long the coverage lasts.
Know that a typical benefit amount can range from $50-$300 a day for about three years, but costs must be paid out-of-pocket until the coverage begins. Fortunately, most types of facilities are covered, including the cost of care in your own home.
When to Purchase Long-Term Care Insurance
The American Association for Long-Term Insurance (AALTCI) suggests purchasing a LTC insurance plan between the ages of 52-60. Investors who purchase LTC plans at a younger age tend to pay a slightly higher premium for a longer time period, but it may be worth the cost depending on your income and circumstances.
Investors who are concerned about developing severe health issues that could disqualify them from an LTC plan may want to consider critical illness insurance, which pays a lump sum if you become ill or incapacitated. Once a certain age is reached, LTC can be added to your portfolio, and the critical illness plan can be dropped.
Tax Deductions for Long Term Care Plans
There are some tax benefits to the purchase of a LTC insurance plan. Some states allow taxpayers to count some or all LTC premiums as a medical expense, and as you age, you can deduct more. The caveat, however, is that the plan must be considered a tax-qualified long-term care plan, meaning the plan meets certain federal requirements. Your financial advisor should be able to help you answer these questions.
The Pandemic Has Affected the Cost of Long-Term Care
The pandemic has motivated many investors to try and plan now for these types of medical expenses, should they become incapacitated down the road. Due to the drastic effects of coronavirus on inpatient nursing homes, models for long-term healthcare and infection prevention in such facilities had to be re-examined. As protocols changed and standards of care increased, so, too, did the cost of insuring oneself to hedge against the cost of LTC.
With so much uncertainty around these costs, health insurance premiums have risen sharply. If you have had COVID-19, it is possible that your application status for LTC insurance, or the way it is underwritten, could be affected in the future.
For more information about LTC insurance, the types of plans that exist, and deciding whether or not you should supplement any current coverage you have with a LTC or critical illness policy, contact your financial advisor or visit www.brileywealth.com.