Long-term care (LTC) is expensive. Even bottom-of-the-barrel
care can break the average retirement income plan. The problem is exponentially
worse for married couples who face increased odds of one or both spouses
needing long-term care. Depending on where you retire, the average cost of a
private room in a nursing home is more than $100,000 per year. That’s today,
and it will likely be even more expensive by the time you need care.
While some retirees will need care for a few days or weeks
at the end of life, others may need care for extended periods of time. My
great-grandmother had around-the-clock care for nearly a decade at Leisure
World in southern California, whereas other people I know died peacefully at
home without receiving much, if any, paid long-term care assistance.
Statistically, around 70% of Americans will need at least some LTC during their
lifetimes. A study by the U.S. Department of Health and Human Services projected
more than one in four retirees will need LTC costing more than $100,000. At the
same time, around 15% of retirees will require care, costing more than
$250,000. Bills could easily go to a half-million dollars for those needing
several years of care or who choose to obtain LTC services in nicer facilities.
A Few Ways to Pay for Long-Term Care in Retirement
There are several ways to pay for long-term care. Each of
these options have pros and cons. Work with your fee-only fiduciary financial
planner to find the best option for you and your retirement security. Look for independent guidance from someone
who doesn’t get paid by selling you a product, whichever one that may be.
From Retirement Income and Assets
If you don’t have any other coverage, you will likely be
paying out of pocket for LTC costs. Typically, those with a net worth above $5
million may find this to be a good option. This number may be higher or lower
depending on if you are single (or a widow/widower) or married, as well as
where you live and personal choices about the type of care you want to have.
Traditional Long-Term Care Insurance Policies
A traditional LTC policy is generally a use it or lose it
insurance. You pay for a daily benefit, and if you don’t end up using it, your
heirs are left with nothing at the end of the day. Personally, not using
insurance is a win, in my opinion. I would wish to get the maximum value from
an LTC policy because that means you are likely in a nursing home (or needing
other LTC care) for a long period of time.
That being said, if you do need extended care, it is great to have
coverage to dampen the out-of-pocket cost.
The number of companies offering stand-alone LTC policies
has shrunk over the past few years, and coverage can be hard to qualify for.
The costs have also been increasing recently, not to mention many current
owners of long-term care policies have seen increases in premiums.
Hybrid Life Insurance/Long-Term Care
More insurance companies are offering life insurance with a
long-term care rider (essentially additional benefits that cover LTC expenses).
The benefit here is that your beneficiaries can receive a death benefit if you
don’t end up needing some or all your long-term care benefits.
Life Insurance with Chronic Care Rider
Life insurance with chronic care riders tends to be the most
flexible when it comes to getting value from your life insurance while you are
still alive. I’ve heard it called life insurance you don’t have to die to use.
Policies like this allow you to access a specific portion of your death benefit
early if you need long-term care. Some policies also come with additional
benefits if you get a terminal illness or critical illness like cancer or stroke.
The chronic care rider can be applied to permanent life
insurance policies that also allow the cash value to be invested and grow and
be withdrawn tax-free if specific IRS rules are followed. This is often called
the Rich Person Roth.
Deferred-Income Annuities
In most cases, the income from an annuity will not be
required to be spent on long-term care costs. Most likely, they are a source of
retirement income that will last the rest of your life. If or when you need
long-term care, you can use this income source to help pay these costs.
You may be able to purchase a Deferred Income Annuity with
additional long-term care coverage or a long-term care rider.
Long-term care costs cannot be ignored when planning for
retirement. When the time comes, I hope to pass peacefully in my sleep, with no
suffering. That being said, my retirement plan accounts for the likelihood that
either my husband or I (or both) will need some long-term care at some point.
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