Have you had a family member or friend who has needed long-term care? Was it related to an illness, accident or memory care issue? In my case, I have a much-loved friend who is suffering from memory issues at far too young an age. In fact, he has reached the point where he needs help with his daily routine of bathing, dressing and eating. His wife was unable to provide the care for him in their home, despite her best efforts. It was just too much for her. Luckily, they had prepared and have the financial resources set aside to pay for his care.
What about you? Have you thought about how much such long-term care will cost and how to pay for it? As individuals live longer, many worry about outliving their savings. At the same time, many older Americans haven’t planned for the looming expense of long-term care. In this post, I will address key options available to pay for this need.
The Costs
To begin, you need to understand that long-term care is expensive. The median 2020 cost of a private room in a nursing home was $105,850, and in-home care costs were approximately $54,000 annually, according to Genworth’s 2020 Cost of Care Survey. Of course, these costs vary by where you live. If you live in the Northeast or in California, these costs can be much higher.
The Big Surprise
Many people believe that their long-term care costs will be covered by their health insurance, Medicare or Medicaid. In reality this is not the case. Health insurance usually provides no coverage, Medicare has a small, short-term benefit for individuals that need intense nursing care and, lastly, Medicaid only covers long-term care costs if the individual effectively has no assets to pay the bill.
What Are the Chances You Will Need Care?
The likelihood that you will need some type of long-term care services are high — almost a 70% chance for the average 65-year-old, according to the U.S. Department of Health and Human Services. Men typically need 2.2 years of care, and women may require 3.7 years. This time period can be much longer if you have a memory care issue and not a physical illness.
Paying for Care
The question is how to plan to have cash available to pay for this financial risk. In practice, there are three ways individuals usually pay for these needed services: (1) paying for it themselves, (2) buying some form of long-term care insurance and (3) relying on their state’s Medicaid program to pay. Let’s look at each option.
Option 1 – Paying for It Yourself
Retirees with significant assets may use their funds to cover long-term care expenses. If you have substantial assets, having to pay for care for three to five years may be quite feasible and a reasonable use of your money. Moreover, those who itemize deductions for income tax purposes may be able to write-off long-term care expenses on their income taxes. The tax write-off may soften the cost blow. On the other hand if you have a Heath Savings Account you could use pre-tax funds to pay the bills.
Option 2 – Buying Some Form of Long-term Care Insurance
Long-term care insurance may cover all or a portion of services, and the premiums depend on someone’s age, gender, health, location and more. For example, the average premium for initial benefits worth $165,000 (growing at 1% to 5% per year to partially offset cost inflation) for a healthy 55-year-old man may cost $1,375 to $3,685 per year, according to information provided by the American Association of Long-Term Care Insurance. A healthy 55-year-old woman may spend $2,150 to $6,400 per year for the same coverage. Other considerations with this form of insurance are: (1) that is underwritten, and you have the risk of not qualifying for the coverage and (2) this coverage is subject to future rate increases, which can make it increasingly expensive.
A hybrid long-term care policy is another option. These policies are part life insurance or an annuity and part long-term care coverage. Buyers may purchase a policy with an upfront payment, eliminating the risk of future premium increases, and their heirs may receive a death benefit or annuity balance if they don’t need long-term care. Coverage benefits for this type of policy are usually cost less than fully underwritten long-term care insurance, but they give you some coverage versus none.
Option 3 – Relying on Medicaid
Medicaid coverage is intended for people at the poverty level who can’t afford the costs. To qualify for Medicaid, low-income retirees with assets below certain thresholds may be eligible for long-term care services. Qualifying for coverage both from a financial and medical standpoint can be difficult.
A Possible New Government Benefit
The Biden Administration has proposed $400 billion in new Medicaid funding for home and community-based elder care as part of the American Jobs Plan. As of the time this post is being written, the measure has not been passed is being debated as part of the 2022 budget proposal. The outcome at this time is not known.
Summary
The costs of long-term care are a retirement planning reality and need to be part of a comprehensive financial plan. You may or may not incur them and you do not know for long you will need to pay them. To have a financially secure retirement you must plan for the situation where long-term care is needed and make provisions to pay for the costs. This is the contingency most older Americans don’t address and should.
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