Few people want to talk about this. But it is important to consider a major long-term care incident when creating a financial plan.
Imagine you’re 55 years old. You’re married, your spouse is also 55, and both of you are healthy. You’re looking forward to retirement in about 10 years and all the plans you’ve made for that stage of life.
Then your financial planner asks a question:
How would you cover the cost of a long-term care incident if it occurred when you are 85 years old?
Three Ways to Cover Long-Term Care
There are three basic ways to cover the cost of long-term care:
- Paying for it yourself (self-insuring)
- Purchasing an insurance product
- Relying on Medicaid
A good place to start is by inserting a hypothetical long-term care event into your financial plan—for example, a three-year care need. How would that affect your finances given all your other assumptions?
The Power of Time and Inflation
I am currently 47 years old. When I insert a similar scenario into my own financial plan, I see that I could potentially be on the hook for more than $600,000 per year by the time I reach 85.
That’s because I’m a long way from age 85, and we assume that nursing home or assisted living costs will increase at about 6 percent per year.¹
Deciding how to address long-term care is closely tied to the other elements of a financial plan, including:
- Your cost of living
- Your investments and savings
- Your age
- Your family composition
If your financial plan still looks solid after adding a major care event, that’s great. While no forecast is perfect, seeing success on paper is an important first step.
When Self-Insurance May and May Not Work
Some families with substantial financial resources may choose to self-insure. On the other hand, families with few financial assets generally cannot self-insure and may qualify for Medicaid.
Many clients assume that Medicare covers long-term care, whether at home or in a facility. Unfortunately, that is not accurate.
Medicare does provide limited rehabilitation benefits related to hospital stays, but it does not cover ongoing assisted living, nursing home care, or long-term home health assistance.
Medicaid, the government insurance program for low-income individuals, does provide long-term care benefits for those who qualify.
However, qualifying typically involves spending down most of your assets, along with meeting other eligibility requirements.
Considering Long-Term Care Insurance
If self-insuring makes you uneasy, it may make sense to consider an insurance product.
Traditional long-term care insurance requires medical underwriting, and “hybrid” policies that attach a long-term care benefit to a life insurance product require life insurance underwriting as well.
The earlier you apply, the more likely you are to qualify.
If you obtain coverage and your financial picture changes later, you can always decide to give up the policy—though that is a serious decision that requires careful thought.
The upside of insurance is that you may be able to transfer some of the financial risk.
The downside is that you must pay premiums—either as a one-time payment or ongoing—and premiums on traditional policies can increase over time.
Evaluating the Value of a Policy
Because most long-term care policies have a maximum payout, we can estimate the value of the policy and compare it with the cost of self-insuring.
A simple approach is to compare the policy limit to the projected cost of care.
For example, if a policy offers $300,000 for three years of care, you should consider whether your financial plan could support an expense of that size on your own.
Actual care costs may end up being lower for a short incident, or much higher for a long one, but the policy maximum is what you can expect the insurance company to provide.
Planning for the Future
While we’re discussing long-term care strategies today, the need for care itself hopefully lies far in the future.
What matters most is that you and your loved ones discuss both the financial and non-financial challenges that long-term care can bring—together and with your financial planner.
Then plan accordingly as best you can.
If you would like help analyzing how a long-term care scenario might affect your overall financial picture, feel free to reach out.
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Note:
¹ Assumes a $7,000 monthly cost in today’s dollars, which may be higher in metropolitan areas and lower in rural areas.