If there's a single unsolved problem in the retirement plans for many Americans, it's what to do about long term care costs later in life.
Although it’s estimated that 69% of all seniors in the U.S. will require some type of long term care services in their lifetimes, fewer than 10% have purchased a long term care insurance policy. These policies aren’t cheap and they don’t cover everything—and like most insurance programs, they can be confusing. If you're among the ranks of those who are undecided about what to do about your long term care coverage, the best way to make smart decisions is to go into the process armed with the best information.
In the following article, we’ll share eight important facts that can help you make the right choice for your specific situation.
- The majority of long term care expenses aren’t covered by Medicare. The median annual cost for nursing home care varies dramatically by state, but according to the Department of Health and Human Services, the current U.S. average is $85,800. That’s a staggering amount of money and it’s increasing every year. Many seniors assume that Medicare will cover costs associated with assisted living, skilled nursing, adult daycare, and/or in-home care, but in reality, the coverage is minimal at best.
- Two years is the average length of time long term care is needed. Americans typically require long term care for one to three years, which might be a much shorter period than you expected. As you go about your planning, keep in mind that this figure is an average: some people will need long term care for a much longer period of time, while others’ requirements will be significantly shorter. For example, a 2017 AARP report estimated that about 14% of people will need long term care for more than five years.
- Generally, it pays to buy young. The best age to apply for long term care insurance is when you’re in your 50s or early 60s and are still in good physical and mental health. Beyond that timeframe, every year you delay, the premiums will become far more expensive. For example, initial premiums at age 65 are 10% higher on average than initial premiums are at age 64. Buying younger also makes you more likely to qualify for long term care insurance, and to receive a “good health bonus” which can reduce your premiums and still applies even if your health declines in the future. The down side? While the premiums will be lower if you buy your insurance in your 50s, you’ll also have to pay them for a longer period of time.
- Four primary factors affect your long term care policy premium. In addition to your age, these elements will determine the monthly cost of your policy:
- Daily benefit: This is the maximum amount a plan will pay for one day of care. Ranging from $50 to $500 per day, you may opt to protect against all of this cost or only a portion of it.
- Benefit limit: This is the number of days or years that a plan will pay a benefit from the time it’s first needed. Benefit limits can vary from one year to lifetime coverage. The longer the benefit limit, the greater the protection but the higher the cost.
- Elimination period: Similar to a deductible, this is the period in which policyholders must pay out of their own pockets before the plan begins to pay. This period normally varies from 0 to 100 days, with the 100-day elimination period yielding the smallest premium.
- Inflation protection: Nursing care costs are rising, so policyholders need a way for their daily benefits to also increase over time. Policies normally contain riders offering automatic daily benefit increases of up to 5% percent each year.
It’s also important to note that, while you can always decrease your coverage amount, you can’t increase it. Therefore, it’s critically important that you assess your budget and goals carefully prior to taking out a long term care policy.
- There’s no guarantee that premiums won’t go up. However, new policies will not see the large increases consumers received several years ago. Insurers now have more information about the actual costs of claims, and they’ve adjusted their projections and pricing accordingly. Still, if you’re shopping for a long term care insurance policy, it’s wise to budget for future rate increases.
- There’s a new hybrid insurance in town. Whole life insurance and long-term care insurance are now offered as a combined policy. Unlike the older variety of long term care insurance, these “hybrid” policies will return money to your heirs even if you don’t end up needing long term care. You don’t run traditional policies’ risk of a rate hike because premiums are locked in upfront. And, if you’re older or have health problems, you may still qualify.
- Purchasing long term care insurance for your parents can be a smart move. People are living longer than ever before, and these life expectancies are increasing at a steady rate. That means that you may be fortunate enough to still have your parents as you reach retirement age. As your loved ones grow older, however, their health may decline, Then the odds become greater that they will require additional care, whether it’s at home, in a skilled nursing center, or other assisted living arrangement. You’ll most likely be taking care of your parents at least in part anyway, and having coverage in place can make the decision to move them to a long term care facility that much easier.
Given all of this information, what should you do?
Start by giving careful consideration to whether or not you would be well-served by long term care insurance. Your financial advisor can guide you in determining how much care you can safely cover using your retirement savings and investments, and how much insurance, if any, you should consider purchasing to pay for the rest.
Long term care insurance can be a vital safety net for many people, but it’s not for everyone. The experienced financial professionals at FAI Wealth Management are here to help you decide if a policy is right for you. Please contact us to learn more.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life's uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.