The Long-Term Care Conundrum

My Comments: It’s a fact of life that as you age, your abilities decline. You can’t run or walk as fast, or as far. For some, they can’t even get out of bed by themselves.

Which raises the question for all of us: At what point is it necessary to get outside help to get us through the day? For millions of us, that day will likely come, assuming we are still alive. So the question appears, who will be there to help us and if it’s not a close family member, how do you pay for it?

This begins to explore this potential crisis, made worse by the pandemic and the increasing longevity of those of us not already dead. If you’re reading this, chances are this includes you…

by Samuel V. Gaeta, CFP \ 22 AUG 21 \

Long-term care insurance, or LTC, helps pay for the cost of home health care or a nursing home. It also covers extended illness or disability. While LTC coverage can be great for retirees, premiums have begun to rise in recent years, making it a difficult expense for those on a limited income.

So, how do you determine the best way to prepare for long-term care costs in retirement? Here are two factors you should consider.

Would You Prefer a Long-Term Care Facility or In-Home Care?

Before you determine what kind of insurance you want, you need to determine how much long-term care will likely cost. A good first step is identifying where you want to live. The average price to live in a nursing home in the U.S. is $93,075 a year ($255 a day) in a semi-private room and $105,850 ($290 a day) in a private room. By 2030, those costs are projected to be $125,085 and $142,254, respectively. I recommend touring the long-term care facilities in your area to see how much they cost and determine whether you can envision living there.

What if you want to live in your own home? You can maintain that comfort and familiarity by hiring someone to come to your home. The average price of in-home care is $53,768 per year. The average price of home-health care is slightly higher at $54,912 per year.

Should You Choose Traditional Long-Term Care Insurance or a Hybrid Plan?

Once you select where you want to live, the next step is to decide whether you can self-insure the cost, essentially determining whether you can earmark some of your current assets to pay for these long-term care expenses if needed. I recommend thinking about this in a what-if context: “If I go into a long-term care facility for ‘x’ years at ‘y’ cost, can I pay for this cost without it affecting my other retirement goals?” If the answer is yes, self-insurance is most likely going to be the most cost-effective and flexible solution to cover a possible LTC expense. 

If the answer is no, but you have substantial liquid assets held outside of qualified retirement accounts, a hybrid LTC insurance policy might be an alternative solution.  These insurance policies are designed to provide LTC benefits but use whole life insurance as the foundation.  After paying a single up-front premium, if you need LTC the policy pays a specified monthly benefit for a predetermined number of years. If you end up not needing LTC or you decide to stop insuring the risk at any point, you would get your original premium back. Hybrid long-term care policies tend to have a more transparent cost structure and more flexibility than a traditional long-term care policy.

Also consider the likelihood of your rates rising during the life of your policy. A report in 2019 claims General Electric does not have enough funds to cover claims for its long-term insurance plans. As a result, the company plans to raise premiums by $1.7 billion throughout the next 10 years. Many companies are doing the same thing. In this case, if you are unable to pay your premium, your policy will lapse and you may get nothing back.