There are two main things every person seeks in retirement—wealth and health. Wealth in order to live comfortably without the need of employment or a paycheck, and health so we can enjoy all the benefits a well-planned retirement can provide. Wealth is somewhat in our control. Yes, we can’t predict the motion of the markets, but we can control how much we save, when we save, and what we spend our money on. Health? Well, that’s a different story.
Taking precautions for health is a prudent endeavor. Frequent exercise, clean eating, and management of stress are important factors in our health and wellbeing. But health can be as unpredictable as the stock market—and the older we get, the greater our chances of encountering an adverse event.
You can protect your wealth through risk management and tax planning, but protecting your health isn’t so simple. And unfortunately, poor health often means a drain on wealth, since healthcare is becoming increasingly expensive. One potential solution to the wealth drain is long-term care insurance. Should you consider long-term care insurance in your retirement plan?
What is Long-Term Care Insurance?
Health insurance covers many of the acute emergencies or protective services we receive for our wellbeing, but it doesn’t cover the whole spectrum. For example, let’s say you suffer a stroke that leaves you requiring a home health aide for a number of months while you recover. Most traditional health insurance plans won’t cover such services, and paying out-of-pocket can be devastatingly expensive.
Long-term care insurance is designed to bridge the gap when health insurance or Medicare fall short. Long-term care plans are designed to cover the following services:
- Physical therapy
- Occupational therapy
- Speech therapy
- Nursing home care
- Home health aides or nurses
- Rehabilitation services
- Hospice care
Many of these types of services and treatments are ongoing, which can vacuum up a nest egg quickly. For example, the average cost of long-term care is over $170,000, according to a recent study, and half of all people over age 65 will need to utilize formal care at some point in their retirement.
The Nuts & Bolts of Long-Term Care Insurance
Long-term care insurance policies are priced using similar criteria to regular health insurance policies. Your age, overall health, type of policy, and duration of coverage period are all factors used to calculate premiums. Monthly premiums for long-term care insurance have gone up steadily over the decades, because the initial underwriters of these plans drastically underpriced them. Because of this, many companies have closed up their long-term care policies and retirees often have horror stories about claim denials.
Today’s policies are offered by fewer companies, but the standard of care has increased and claim denials are less frequent. But long-term care policies don’t get the same bang for the buck anymore, and premiums are costly. Here’s a sample policy: a 61-year-old male in good health might purchase $200,000 in coverage ($200 per day) for a 3-year period with 3% inflation protection and a 90-day waiting period. A policy like this would cost in the ballpark of $300 per month.
Two important clauses are embedded in each policy:
- The Benefit Trigger is an evaluation by a medical professional to determine whether care can be applied to a specific situation. In order to ‘trigger’ care, the medical professional will need to confirm the policyholder has lost the ability to perform at least two ‘Activities of Daily Life’, or ADLs. ADLs include eating, bathing, using the toilet, dressing, and transferring (i.e., mobility).
- The Elimination Period would be more easily understood if they called it the waiting period. This is the length of time between the benefit trigger and the application of benefits. If you have a 90-day Elimination Period, you’ll need to cover long-term care costs on your own for 90 days until benefit payments kick in.
Should I Purchase Long-Term Care Insurance?
If you have substantial savings in your retirement accounts, you can likely afford the out-of-pocket costs of most long-term care services. If you don’t have a large nest egg, you likely will get Medicare benefits that prove more cost efficient than long-term care insurance plans. Plus, hybrid life/long-term care policies now exist that combine both types of insurance into a single policy with intrinsic value.
However, long-term care insurance still makes sense if you are worried about running out of money later in life due to unexpected care costs. Consider your family history—sufferers of cognitive diseases like Alzheimer’s and dementia, for instance, often require daily care on an indefinite basis. Buying insurance is always a personal decision, but long-term care is even more unique. Before purchasing any type of insurance, always consult with your advisor to make sure the choice is a prudent one.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice.