Answers to your biggest long-term care questions

Have you ever thought about long-term care insurance? What it is? Whether you need it?

Because we’re pretty sure that out of our 40,000+ email subscribers there’s a large chunk of you that have a ton of questions about this specific component of retirement planning.

And we get it – it’s confusing!

Keep reading for an easy-to-understand breakdown of long-term care basics. 

What is long-term care? 

As you age, you’re more at risk of developing serious health issues that may require someone to assist you with everyday activities for an extended period of time. Think dressing, eating, and bathing. This care could take place at your home (known as home-based care), or, if around-the-clock aid is needed, at an assisted-living facility or nursing home.

As you can probably guess, this type of care can be expensive – and it varies by city and state. Just take a look at the differences between the median monthly cost for various types of care around the country, as well as what the costs are projected to be in 20 years, according to the insurance company Genworth:

Wow, OK. What are the chances I’ll need long-term care?

Unfortunately, employer-based healthcare usually does not pay for these types of services. And Medicare only covers short stays at a nursing home or some in-home care if you meet very, very strict conditions.

This is where things get tricky. Because it’s all about percentages.

The Department of Health and Human Services recently found that about 7 in 10 people turning age 65 today will need some type of long-term care services (either in-home or in a facility). Women, on average, typically need care for about four years, while men need it for a little longer than two years.

And here’s the number that can get scary: About 20% of those who need the care will need it for longer than five years.

On the other hand, a separate study by the Center for Retirement Research at Boston College discovered that half of men and about 40% of women using nursing home care don’t stay longer than three months.

Now, it can be easy to look at these percentages and think, “Well, some people won’t need long-term care. Or, if they do, not for very long. I’ll just chance it.” But is that a risk you’re really willing to take with your savings? Because, just as with any other financial risk, you should try to mitigate its potential impact.

This is where a long-term care insurance policy can be beneficial. Policies typically reimburse policyholders up to a certain daily amount for services that help with daily activities.

But do I really need to buy a policy? 

As with many questions in the financial world, the answer to whether or not you need a long-term care policy is, “It depends.” If you have sufficient enough retirement savings, you may be able to self-insure, which means paying for the long-term care costs out-of-pocket.

However, if you can’t self-insure, yes, you may want to consider buying a long-term care insurance policy. But you – or your advisor – need to run the numbers to make sure you can actually afford the policy. Annual premiums average $2,700.^[i]

Even more importantly, what kind of coverage are you getting for the premium you’re paying? There are only about 15 insurers actually offering long-term care policies these days – compared to the 100 insurers that offered them in the 1990s – resulting in fewer coverage options^[i].

And Kiplinger’s has found that the most comprehensive benefits that were once popular and easy to buy (like lifetime coverage with 5% compound inflation protection) are now either not offered or too expensive for most people to afford. 

If I need a policy, how do I buy one?

The earlier you start looking the better. Because once you get into your mid-to-late 60s, premiums can start rising exponentially – a 65-year-old could have an 8%-10% higher premium than a 64-year-old!^[i]

The sweet spot for buying a policy is typically between the ages of 55-64.

If you work with an advisor, he or she should first establish if long-term care insurance is something that your financial plan has determined you need. Then, your advisor should be able to offer recommendations and assist you with shopping for coverage.

No advisor? You can either buy a policy yourself or work with an independent long-term care insurance agent. Just make sure he or she is licensed to sell policies from at least 3 different carriers.

When shopping, look for a policy that covers 3 to 5 years. And generally, it makes more sense to stick with a straightforward long-term care policy as opposed to a ‘hybrid’ policy that combines whole life insurance and long-term care coverage. This type of policy can be much more expensive, and since it’s trying to serve two purposes (as a life insurance policy and a long-term care policy), coverage and benefits can be spotty.

It’s also critical to buy from an insurance company that meets several criteria:

• It’s an established name
• Shows a commitment to long-term care and healthcare
• Has proven underwriting experience
• A ratings agency (such as Moody’s or Standard & Poor’s) rates it highly for its financial strength

We also want to mention that, depending on a carrier’s health requirements, not everyone who is looking to buy a long-term care policy will actually qualify for coverage.

The discussion around long-term care is just like so many others when it comes to retirement planning: It’s completely dependent upon your particular circumstance. We highly recommend basing your decision on a comprehensive financial plan that’s created by a credentialed advisor. Because how do you know the risk(s) you need to protect yourself (and your assets) from if you don’t have a clear picture of the entirety of your financial situation?

[i] https://www.aarp.org/caregiving/financial-legal/info-2018/long-term-care-insurance-fd.html