5 Ways for Planning Long-Term Care Expenses
We are living longer. That means most of us likely will need some long-term care during these added years.
In considering later life's possible care costs, it is prudent to ask whether a long-term care insurance policy could help. Unfortunately, the answer is not a simple yes or no.
Here are five issues to examine before deciding whether to purchase a policy.
1. Do not count on Medicare or health insurance policies
Many people wrongly assume that their health insurance or Medicare will cover long-term care expenses. While Medicare does cover a limited amount of rehabilitation and recovery costs in a skilled nursing facility, the treatments must follow a hospital visit. Even then, the federal insurance is limited.
The more common need as we age is for custodial care, which provides support for daily living activities such as eating, bathing, and dressing skills that typically decline slowly over time. Medicare and health insurance do not pay for this type of care.
2. Consider the length of care
While 70 percent of individuals will need long-term care, further studies show that around half of these individuals stay in a facility for less than 100 days. The length of your care is important because all long-term care policies include an elimination period, typically 90 days, which designates the amount of time you have to be in care before the policy begins paying benefits.
Essentially, you are gambling on whether you will go into long-term care long enough for your policy to kick in. Family history can be a good indicator of potential needs, but it is not the ultimate factor. Also evaluate the worst-case scenario to determine whether your savings would be adequate, or whether insurance will be necessary to supplement added costs.
3. Evaluate costs and benefits
Premium costs for long-term care policies can be expensive, anywhere from $2,000 to $4,000 or more per year depending upon your age and policy features. Riders and annual premium hikes can further increase coverage costs. Make sure you understand the policy's fine print, as well as when it does and does not pay and what type of care it does cover.
Also examine the coverage's range-of-care options, such as home health care, adult daycare and assisted living facilities, so that you are not confined solely to nursing homes. However, keep in mind that the broader the coverage, the more costly the policy.
A thorough cost-benefit analysis can help you determine whether a long-term care policy is appropriate. You might find that earmarking the amount of premiums towards savings is the better alternative. Qualitative benefits should be as much a part of this discussion as the quantitative, as the peace of mind insurance provides is itself of great value to some.
4. Estimate changing lifestyle costs
While medical expenses will increase drastically upon entering long-term care, it is also likely that other living expenses, such as travel and entertainment, will decrease significantly. This can help offset the $80,300 per year that is the average cost of a semi-private nursing home room.
5. Examine impact on other goals
While self-insuring gives you more flexibility, it might not always be the ideal option.
When you allocate a portion of assets for long-term care, your trade-off is likely to be lower spending in retirement years. You must decide whether that is an acceptable exchange. Also note that if you use savings to pay long-term care, it will reduce the amount you can leave your heirs. Will this contradict your estate plan objectives?
In such instances, insurance may be the best choice, allowing you to protect your personal funds for other uses. Goal prioritization is an essential part of determining whether an insurance policy is appropriate.
When making your final decision, you want to keep in mind the primary purpose of insurance — to insure what you cannot afford to lose. Your wealth manager can help you with this analysis, as well as work with you on other financial strategies to meet your short- and long-term goals.