The unfortunate reality is that about half (52%) of Americans turning 65 today will need some kind of long-term care over the course of their life (1). People often look toward long-term care insurance as a solution to this financial problem. However, whether or not long-term care insurance is a good fit for your unique situation is worth a little bit of investigation before purchasing a policy.
Before we get any further on this topic...
I want you to know that I don’t sell long-term care insurance (or any type of insurance, for that matter). As a fee-only financial advisor, I don’t accept commissions from insurance companies when you buy a policy. I’m in no way trying to sell you something here, and I’m not sharing this information to motivate you to buy something from me. Alright - now that we have that taken care of…
Long Term Care is Expensive
That might be the understatement of the century. According to the Genworth Cost of Care Survey, the average cost of a private and single bedroom in a care center in Topeka, Kansas, is $4,558 in 2018. If you’re looking for a private room in a skilled nursing home in Topeka, Kansas, that cost jumps to an average of $7,184. And yes, that is a per month cost(2).
And Topeka is under the national median cost! Genworth has this handy tool to calculate monthly costs for each state, and gives you the option to break it down by daily, monthly, or annual cost.
The truly astounding part? Those numbers are expected to grow exponentially by 2047. In 2047, Genworth estimates that the national median monthly cost for a private room in a nursing home will be $19,712. That’s insane.
Medicare Doesn’t Cover Everything
You may think that, if you’re covered by Medicare, all of your long-term care expenses will be covered. This assumption is incorrect. In order to have Medicare cover even a portion of your long-term care costs, you must meet these three qualifications:
- You had a recent hospital stay (three day minimum).
- You’ve been admitted to a Medicare-certified nursing facility within 30 days of that hospital stay.
- You require skilled nursing services, physical therapy, or other skilled care.
Even if you meet all three of these qualifications, Medicare will only pay 100% of your costs for the first 20 days of your stay in a long-term care facility. They’ll also cover any costs exceeding $140 from day 21-100 - but then you’re on your own to cover the rest.
What Happens Then?
Once Medicare stops covering your long-term care costs, or if you never had Medicare cover a portion of these costs, you typically pay for long-term care using your own assets. Once your assets are used up, Medicaid takes over. Medicaid is the government’s welfare program, and your state helps to determine the income and asset threshold you have to spend on your care before Medicaid kicks in to help cover costs. Almost half of the long-term care costs in the United States are currently being covered by Medicaid. As the baby boomer generation reaches their eighties, this number is expected to grow.
In the event that you pass away, federal Medicaid estate recovery laws take effect and any assets in your name can be sold to recoup what the government has spent on your care. This means that your home can be sold, and other assets can be tapped to pay back the government. Of course, these laws don’t take effect until after your surviving spouse passes away, too.
Is Long Term Care Insurance the Solution?
There are plenty of articles out there discussing the benefits long-term care insurance. These articles are primarily written by insurance companies or agents who are trying to sell you a policy - and so, I'm here to give you a different perspective and a few reasons why you might want to reconsider purchasing that LTC policy.
LTC Insurance is Pricey
The cost of long-term care insurance varies greatly. The cost you could get quoted with one insurance carrier can be significantly higher than another so it really pays to shop around. A couple, age 60 are going to pay around $3,000 to $4,000 a year for a decent LTC insurance policy. That's a pretty good chunk of change, and it will certainly add up over the years given the average age a claim is made is 79(3). And just like your auto and homeowner's insurance, traditional long-term care insurance is a "use-it-or-lose-it" product (unless you purchased a "Return of Premium" rider which makes the policy even more expensive).
Watch Out For “Gotchas”
Yep - even in a long-term care situation where you’d expect your insurance to kick in, the company might make it difficult for you to access your benefits. They often only cover up to a certain amount per day, or they have specific restrictions you must meet in order to qualify. It’s also important to remember that your coverage may be limited to specific certified home-care agencies or state-licensed professionals. In other words, it's unlikely that they are going to pay your family members to take care of you.
The elimination period is the number of days a person needs to participate in long-term care before their insurance company will start to cover the costs. For most policies, this period is 90 days.
Activities of Daily Living Clause
Most LTC insurance policies require you to meet certain criteria commonly known as "benefit triggers" before you are eligible to receive a payout from your policy. The most common is being unable to perform a certain number of "Activities of Daily Living". These activities can include bathing, eating, dressing, toileting, and transferring in and out of bed. It's important to read your policy and understand what and how many benefit triggers you must meet in order to receive long-term care coverage.
Here's why you should take this into consideration. If you own an LTC insurance policy and are living in an assisted living facility, BUT can still perform most of these activities on your own, you likely won't qualify to receive your benefits.
Now let's say you have an accident (like a fall) that further hinders you from performing these Activities of Daily Living. The problem is that it's not uncommon for you to improve before the end of your Elimination Period (meaning you won't qualify to get paid again). It's also important to note that statistics show the majority of seniors spend their LTC time in an assisted living facility.
Premiums Can Change
Before you buy a long-term care insurance policy, you should know that there is no guarantee the premiums will stay the same forever. Matter of fact, in recent years, dramatic premium increases have become more the norm than the exception due to faulty cost projections(4).
Long-term care insurance is priced to generate a profit, but if claims are higher than expected, the insurance company may experience losses and therefore reserve the right to protect themselves by increasing premiums through a "Limited Right to Change Premium" provision found in your contract.
Luckily for you, insurance companies can't raise your premiums due to deteriorating health, age, claims history, or "just because". In order for insurance companies to raise premiums, they have to submit (and get approved) an actuarially-justified request to the insurance regulators in each state to do so. If you run into this situation, you do have options to avoid paying the increased costs by reducing your benefits or stop paying the premiums altogether and receiving a paid-up policy.
So, What Do You Do?
I understand why so many people are interested in purchasing long-term care insurance. Nobody wants to think their heirs could be hurt because they don’t have a policy in place to protect their assets in the event that they have an unsuspected LTC cost.
*Side Note: if you’re single with no heirs, you likely don’t need LTC insurance or life insurance because you don’t have any heirs who you’re protecting your assets for.
But the fact of the matter is: the likelihood that you’ll stay in a LTC facility long enough while meeting all of your insurance company’s requirements to qualify for your benefits is low. In fact, according to the Society of Actuaries, only about .64% (that's 64 out 10,000 policies) qualify to have their claims paid(3) 😲. Of course, you might hear about that one random case where the insurance company was on the hook for a bajillion dollars of someone's care; research finds the average LTC claim is 2 years costing $88,166. Which yes, is still a lot of 💰 BUT most of my clients' retirement nest egg could still afford to cover. And if not, there's Medicaid to the rescue.
Consider Other Options
I typically recommend that clients avoid LTC insurance policies - your money is better spent elsewhere. However, it’s worth having a conversation with a CERTIFIED FINANCIAL PLANNER™ to understand all of your options.
Instead of paying through the nose for a policy that might not get you squat - you can do so much more with that money each month with investments and a unique, tailored financial strategy. You have a much higher risk of running out of money during retirement due to longevity rather than because you spent too long in a LTC facility; investing accordingly can help you grow your wealth to provide a sustainable retirement income. In the long run, you’re more likely to be able to pay out of pocket for LTC expenses with the money you’ve saved instead of an LTC policy benefit payout.
Another option to consider (if you’re eligible) is to save for potential long-term care expenses in a Health Savings Account. This account is part of many tax-efficient saving strategies, and can help you get ahead of the game when it comes to preparing for medical expenses during retirement.
Keep in mind that, while there’s a lot of pro-LTC-policy propaganda out there, only 8% of Americans actually buy in and purchase a policy(1). That's probably why long-term care insurance sales are at a 25-year low today(4). While there may be occasional cases where they make sense, for the majority of U.S. retirees - they don’t.
Getting on track for retirement doesn’t have to be confusing.
Get my FREE report, "7 Reasons People Fail at Retirement".
You Might Also Like:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.