By 2033, more than 11 million middle-income seniors age 75 and older may not be able to afford assisted living or qualify for Medicaid to pay for their long-term care.
These findings released in August by researchers with NORC at the University of Chicago, reinforce the need for Americans planning for their future to consider available options to maintain a comfortable lifestyle in retirement.
While many seniors turn to their adult children for housing and care, financial advisors who specialize in retirement planning suggest long-term care insurance can help reduce or eliminate the funding shortfall for retirees to retain their independence.
What Is Long-Term-Care Insurance, Who Should Buy It, and at What Age?
First, let's find out what Long-Term Care Insurance (LTCi) is, who needs it, and how early you should buy it.
Bradley Hilton says, “Being hit with unexpected and exorbitant bills for a nursing-home stay or in-home care can wreck a great retirement plan if not budgeted or prepared. Most people will need long-term care (LTC) at some point.”
Michael R. Acosta, CFP®, ChFC®, Financial Planner at Consolidated Planning, adds, “LTCi provides nursing-home care, home health care, and personal or adult day care for individuals age 65 or older or with a chronic disabling condition that needs constant supervision. Middle-class people or those with a family history of medical concerns should plan to need LTCi.”
Kevin Lao, CFP®, Founder and Director of Financial Strategies, Imagine Financial Security, LLC, elaborates, “If you ever need custodial care or long-term care, the insurance company will usually reimburse you for related expenses, up to a daily or monthly amount.”
What Are LTCi Parameters Important for the Insured?
LTCi has many parameters that determine your benefits and, thus, your premiums.
These include the benefit amount and length of coverage.
Hilton points out that the average length of LTC needs for men and women are 2.2 and 3.7 years, respectively. You can reduce your premiums by paying for just three or four years of coverage. If you're concerned your case may be longer than average, you can try to economize elsewhere.
Kevin Lao says, “The average cost of a nursing home is north of $100k a year, or just over $8,000 a month. A policy that fully reimburses you for this amount will cost a pretty penny. However, if you can afford it and the risk causes you to lose sleep, do it!”
Next is the initial exclusion period, or how long you cover your LTC costs before your benefits start. The longer the exclusion period, the lower the insurer's risk, thus lowering your premiums.
Timothy Bock, President of Summit Portfolio Management, says, “It's been my experience that a good way to save money on LTCi is to have a waiting period of six months to a year. For many people, (living) out of pocket for a year is very manageable.”
Another important one is coverage exclusions, or what cases let the insurer off the hook. For example, Hilton says, “Policies may limit what conditions they cover. For example, it's not unusual to deny care for alcoholism, drug addiction, or war injuries.”
On the flip side, Hilton says most policies waive your premiums when you receive benefits.
Lao says, “If you want flexibility for at-home care and any professional facilities, ensure your policy has 100% coverage for at-home care. I've seen nursing-home or adult-day-care coverage at 100%, with at-home care at 50%, and the client has no memory why they bought a policy like this.”
Hybrid Life/LTC Policies
Acosta and Lao both suggested considering another, attractive option.
Acosta says, “Nowadays, carriers offer traditional LTCi and hybrid options. Hybrid options offer more flexibility, more bang for your buck, and often fixed-guaranteed premiums compared to traditional LTCi, which aren't guaranteed and fluctuate over time. With hybrid coverage, the carrier often offers some form of the death benefit (maybe guaranteed), access to investment strategies within sub-accounts, and a pool of LTC coverage.”
Lao adds, “Some policies now have a hybrid life insurance component, where they pay a death benefit if you don't use the policy or only use a portion of the LTC benefits.”
The Most Tax-Efficient Ways of Saving Money on LTCi
The problem here is that LTCi policies have become more expensive over time.
Hilton explains why: “LTCi premiums can increase over time. The insurer must get approval from state regulators to raise the premiums, which happens from time to time.”
Lao offers five tax-efficient ways of covering LTC.
– “Use tax-free money from your Health Savings Account (HSA) to cover LTCi premiums.
– “Do a so-called ‘1035 Exchange' of a cash value life or annuity. If you've built up cash in a permanent (not term) life insurance policy and may no longer need the coverage in retirement, you could do a tax-free exchange of the cash value into an LTCi policy.
– “The hybrid options mentioned above can protect your investment assets if you need LTC. If you do not need LTC or don't use up your entire benefit pool, the death benefit will pass on to your beneficiaries.
– “If you have no heirs or they don't need your legacy, you can self-insure using tax-free withdrawals from your Health Savings Account (HSA) assets. You can use Required Minimum Distributions (RMDs) from your 401(k) or IRAs (that you'd have to pay tax on anyway) or even a reverse mortgage.
– “If you can afford to self-insure but want to leave a financial legacy, you can buy a permanent life insurance policy to replenish your assets when you die, even if you had to pay for LTC near the end of your life.
The Bottom Line
Most people would benefit from at least considering LTCi, especially starting their late 40s or early 50s. However, after over a decade of premium increases and benefit decreases, buying great coverage is nowhere near as possible or affordable as it used to be.
If LTCi is suitable for you, there are still tax-efficient ways to buy affordable coverage.
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