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These 5 factors will tell you if you need long-term care insurance

Until recently, I was like many Americans who have some important misunderstandings about who actually pays for care that older adults often require. According to a recent survey of Americans age 40 and older, 18% of individuals believe that employer-based health insurance will pay for extended care that takes place in a nursing home or assisted care facility [1]. Similarly, 34% of those polled in the same study believe Medicare will foot the bill for this type of care. Unfortunately, neither Medicare nor private health insurance will pay for long-term care.

The term ‘custodial care’ refers to any help provided by a loved one or professional that is required to carry out activities of daily living such as bathing, dressing, and eating. If you or your partner were ever to need at-home, assisted living, or nursing home care to provide such custodial support, your family would likely have to pay out-of-pocket. Imagine having this expense last for lasted months or years. The cost of this care could wreak havoc on your retirement nest egg, the joint savings you share with your partner, and your family’s other financial resources.

Long-term care insurance (LTCI) is one way to protect against the worst of these financial burdens. Here are the most important factors to consider when evaluating if long-term care insurance is right for you:

  1. How you want to be cared for if (or when) you can’t take care of yourself
  2. Your age
  3. How much you have saved for retirement
  4. Your financial stability (to pay premiums)
  5. How much you want to leave to your family when you’re gone

1) Future care preferences

If you began to lose the ability to fully take care of yourself later in life, what is the environment where you would want to receive care? What kind of resources would your family have when mobilizing to support you and deliver this type of care? Those planning for retirement should consider these questions starting in their 50s and 60s.

Most individuals have a strong preference for staying in their own homes as long as possible. With the correct planning and savings, you may be able to receive custodial support that is provided in your own home for years. Still, as an older adult, having multiple care options can be critical in adverse scenarios. Being able to choose where and how you are taken of can reduce the burden on you and your family if you were to ever lose mobility or the strength to take care of yourself.

Thankfully Medicaid provides one layer of support for many US citizens seeking long-term care. Those with limited or no resources can typically receive basic long-term care through a private or government-run facility that is paid by Medicaid. However, patients relying on government support for their long-term care may encounter caps in the scope of care they receive. This could include room sharing, supplemental social activities, or any tailored food that is beyond what is generally prepared by the facility [2]. Similarly, Medicaid does not typically pay for home care options.

Since Medicaid support is usually only available after you have liquidated all or most of your savings and financial assets, your family may have little recourse to change your care. In addition to paying for many types of home care, long-term care insurance can help to provide for a broader array of care options. This may include a private room or participation in social outings in a typical care facility or being able to reside in one of the many facilities that do not accept Medicaid payments.

2) Your age

Timing is critical if you are considering a long-term care insurance policy. If you purchase a policy too early, you begin paying premiums many decades before you may ever need to make a claim. However, the younger you are when you first purchase the insurance, the lower your premiums will be — buying too late means paying sky-high premiums. Conventional wisdom suggests acquiring a long-term care insurance policy between the ages of 50 to 65. Those purchasing policies in their 50s are usually better positioned to pay lower premiums for the insurance over the course of their retirement. However, depending on your health, purchasing long-term care insurance in your 60s may also deliver good value for the protection that is covered.

3) The expected size of your retirement nest egg

There is a sweet spot for those who are most likely to benefit from long-term care insurance. If you expect your retirement nest egg to be less than $100,000 at the start of your retirement, you are probably better off allocating what you would pay for LTCI for other purposes. On the other hand, if you are among the top 2% of income earners, you are better positioned to self-fund extensive and costly medical or nursing home care. Top earners and those prepared to make very large upfront payments can also consider life insurance policies or annuity products that include a long-term care rider.

For the millions of Americans who fall in between these two camps, long-term care insurance may be well suited to serve as an additional layer of protection during the course of your retirement. Although monthly premium payments are often high for these types of policies, long-term care insurance can provide protection against significant financial distress and help ensure access to quality medical care in late life.

4) Stability in your cost of living

To get the most out of a long-term care insurance policy, you must consistently pay your premiums over many years. Traditional long-term care insurance does not cover care claims if you have missed a number of recent premium payments. For this reason, you should only purchase a policy if you are reasonably confident you will be able to make every yearly or monthly payment through most or all of your retirement. You should reflect on your current income, your current cost of living, and how stable you expect your income to be in the future. Budgeting premium payments into your retirement plan in the context of your cost of living is an essential step of realizing the protection and potential value of LTCI.

Potential customers should also be aware that most LTCI contracts contain clauses that allow for arbitrary rate increases during the life of the policy. Historically, this had caused problems for consumers in the 1990s and 2000s when rising costs of healthcare, patient longevity, and other factors forced insurance companies to increase the premiums charged to existing long-term care insurance customers. Many experts now think that large rate increases are less likely for new policyholders as insurance companies and regulators have adopted new premium structures to help correct previous pricing errors.

As a practical point, it is good to remember that no one can predict the cost of long-term healthcare one or two decades from now, not even experts at insurance companies. For this reason, you should allow for a buffer in the payments you might make towards an LTCI policy and other healthcare components of your retirement.

5) The desire to leave an inheritance to your family

Do you have a desire to leave behind property or financial assets to your children? What about preserving savings for your partner if you were to pass away before them?

Long-term care insurance can help to protect family assets in a scenario where you were to need prolonged and expensive medical or supportive care. Most LTCI policies have a set maximum payout so this protection is not unlimited, but a well-chosen policy can help to bear the brunt of expense for an extended stay in a nursing home or for care provided in your home while on disability.

Conclusion

You should take each of these factors into account when considering if long-term care insurance is right for you. Other important areas to consider include your family’s medical history and your location. For all of the factors listed above, think about what is most important to you when accessing your situation and choosing amongst different LTCI policy types. Knowing that you have a well designed LTCI policy or an alternative approach for paying for long-term care expenses can give you and your family peace of mind.

Interested in learning more about LTCI products that are specifically built for a new generation of planners who are saving for their retirement? Join Bolster on our journey to deliver simple, low friction solutions that protect your finances and future care options.

 

 

References

[1]  https://www.longtermcarepoll.org/long-term-care-in-america-americans-outlook-and-planning-for-future-care-2/

[2] https://www.medicaid.gov/medicaid/ltss/institutional/nursing/index.html

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