By Jeremy Wallace and Andrew Hart
If 2020 taught us anything, it’s that life is unpredictable. Most of us (if not all) were hit with the hard reality that an emergency can strike at any time, and try as we might, we can never fully prepare for everything that could come our way. But that doesn’t mean we shouldn’t take action to set ourselves up for success, especially when it comes to financial matters. Creating a long-term care plan is a perfect example of this.
More than half of people turning 65 will need some form of long-term care during their lifetimes, so it’s critical to have a plan to pay for these costs. (1) Unfortunately, many Americans have a glaring blind spot in the form of long-term care planning, with only 1 in 5 adults making the effort to finance their future long-term care expenses. (2)
November is Long-Term Care Awareness Month, which makes it an ideal time to start thinking about your long-term care plan and reviewing your options. Let’s cover the following frequently asked questions to help you start crafting your plan, as well as a few strategies to help you finance this piece of your retirement plan.
What Kind Of Costs Am I Looking At?
Long-term care costs are so high that they could potentially wipe out a bulk of your retirement funds. On average nationally, it costs $280 per day or $8,517 per month for a private room in a nursing home. (3) To make matters worse, because of their longer life expectancy, women pay significantly more than men for long-term care. The average amount of time women require long-term care is 3.7 years (or around 44 months), adding up to $374,748 in expenses in today’s costs for that private room. (4) For men, who need long-term care for an average of 2.2 years (or around 26 months), that equals $221,442.
And costs are only projected to increase. In the past five years, long-term care expenses have risen by about 3%, with a big jump in prices from 2016-2017. (5) By 2028, the average cost is expected to increase to $5,376 per month for assisted living, (6) compared to $4,000 today. (7) These costs can vary based on the level of care and amenities needed, as well as the size of the room and the location, so your first step in making your own long-term care plan is to decide what type of care you prefer.
How Do I Choose The Care I Want?
If you have a family history or early signs of Alzheimer’s or dementia or if you suffer from a chronic disease that will require ongoing care or daily assistance, look into facilities that offer the care you’ll need, and share your thoughts with your family. Would you prefer to live in a nursing home or would you like nurses and assistants to come to your residence? Do you want a religious community of care? There are several preferences to take into consideration when considering your long-term care plan.
Having the option to make these choices yourself lends much-needed autonomy to your long-term care plan. If you wait until you need it, you may not be in good enough health to make the decision, or the size of your savings might determine the care you receive. Whether you’re worried about potential health concerns or want to protect your hard-earned wealth, it’s important to understand the long-term care insurance options available to you and whether or not a policy makes sense for your lifestyle and needs.
What Are My Long-Term Care Coverage Options?
Long-term care coverage isn’t cheap, but it pales in comparison to long-term care costs. Here are some options to consider when creating your long-term care strategy.
1. Traditional Long-Term Care Insurance
With traditional long-term care insurance, you pay a premium in exchange for the ability to receive benefits if they are needed. If you need long-term care at some point, the policy provides you with money to pay for it. If you never need long-term care, then you receive no benefits. It’s a “use it or lose it” policy.
Just like any insurance policy, you will have some coverage choices to make.
You can choose the level of insurance you want and select the daily benefit amount for care in a nursing home. You can also add home-care coverage if that is a priority for you. To choose the right coverage amounts, you need to know what the cost of long-term care looks like in your state. For example, a private room at a nursing home in Kentucky will cost an average of $7,604 a month, and hiring a home health aide could set you back almost $46,000 for the year.
Length Of Coverage
You must also decide on the length of time you want the benefits to be paid. Common options are one, two, three, or five years, or for your lifetime. Logically, the longer the benefit period, the higher the premiums you will need to pay.
Your policy will also indicate “benefit triggers,” or conditions that must exist to receive benefits from the insurance company. A tax-qualified plan only pays benefits once you are unable to perform two of six activities of daily living without substantial assistance for at least 90 days, or have a cognitive impairment like Alzheimer’s. Non-tax-qualified plans may have less restrictive benefit triggers.
Inflation And Premiums
If you want, you can have your benefits increase with inflation to match future care costs. It is also important to note that premiums can increase as they are not usually set in stone.
2. Life Insurance With A Long-Term Care Rider
With a traditional long-term care policy, people sometimes feel that if they buy it and don’t use it, they have wasted their money. Because of this, several hybrid products have emerged. One very popular solution is a life insurance policy with a long-term care rider. This strategy is enticing because if long-term care is needed, the funds are available through your policy’s death benefit. If you don’t spend the total benefit available, your beneficiaries will receive the balance upon your death, thus no wasted money.
If you need life insurance, getting your long-term care coverage as a rider may be a good option. This way, someone will be benefiting from the premiums you are paying, whether it is you or your heirs.
3. Annuity With A Long-Term Care Rider
If you don’t need life insurance, another combination product may be better suited to your situation. If you purchase a variable annuity, you may have the alternative of adding a long-term care rider onto the contract. Since 2010, the IRS allows for the long-term care portion to be used tax-free. (8)
After purchasing the annuity, you would select the amount of long-term care coverage you want, often two to three times the face value of the annuity, as well as the length of time you want coverage. Finally, you have to decide if you want inflation protection.
This option makes money available to you if you need long-term care. Otherwise, you can cash out the annuity when it matures (in which case you would lose your long-term care coverage) or let it accumulate and ultimately pass on the assets to your heirs.
Obtaining long-term care coverage through an annuity can be appealing because it is generally less expensive than stand-alone insurance and you can receive coverage without medical underwriting. Annuities tend to be less common than the other choices, though, because of the current low-interest rates and the large up-front investment.
4. Save On Your Own
Consider starting a savings plan specifically for future healthcare needs. One option is to create a separate, high-yield savings account and contribute a specific amount every month, building a contingency fund for whatever healthcare expenses come your way. If you end up not needing long-term care, the money is still yours and can be used for your living costs, unexpected expenses, or an inheritance for your heirs.
Do You Have A Plan Yet?
We at Wallace Hart Capital Management understand that thinking about the need for long-term care can be deeply unsettling and confusing. But you’re not doing yourself any favors by avoiding to take action. No matter where you’re at in life or the financial obstacles you face, the important thing is that you take the first step in planning for this aspect of retirement.
Remember that you’re not alone on this journey; our team is here to optimize every piece of your financial plan and provide you with the resources you need to make the best decisions for your unique situation. If you have questions about your long-term care options and want to make sure you have the coverage you need, contact us today at 859.300.3030 or request an appointment online. We look forward to hearing from you!
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.
Andrew Hart is the co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ designation. When he’s not working, you can find him enjoying the city of Lexington, KY and spending time with his wife, Susan, twin sons, George and Ted, and daughters Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.