How to Invest Well in Long-Term Care

Older couple walking down path in the woods

Findings from long-term care research have revealed that 74% of Americans believe a healthy lifestyle will prevent them from ever needing long-term care. For most, this is simply not true, and it’s in your best interest to take steps sooner rather than later to manage the very real risk expensive long-term care poses to your retirement savings.

There are two primary reasons to buy long-term care insurance:

To protect your retirement savings. The Department of Health and Human Services estimates that one in four people now age 65 will pay over $50,000 in life-time out-of-pocket long-term care costs, about 9% of them $250,000 or more. Long-term care insurance can help prevent retirement short-falls.

To increase your options for care. With a long-term care policy, you won’t be limited to nursing homes that accept Medicaid (which does pay for these expenses, once your savings are depleted). Moreover, Medicaid doesn’t pay for assisted living in many states, and doctors all over the country are reducing the number of Medicaid patients they see.

As compelling as these reasons are, many people still question the value of long-term care insurance.

Long-term care insurance in a nutshell

Long-term care provides services for those who are either chronically ill or disabled and no longer able to care for themselves. These services can include both medical and non-medical care and can be performed in-home, in an assisted living situation, or in a nursing facility.

Eligibility for filing a claim generally hinges on being certified as “disabled” by a physician, meaning that you’re unable to perform at least two of the following “activities of daily living,” or ADLs, on your own:

  • Bathing
  • Caring for continence
  • Dressing
  • Eating
  • Toileting (getting on/off the toilet)
  • Transferring (getting into/out of a chair or bed or walking around the house)

Medicare generally covers hospital stays and up to 100 days in a nursing facility. Unfortunately, long-term care policy coverage doesn't take effect immediately after your hospital stay. There’s a 30, 60, or 90 day gap before you’re considered permanently disabled, depending on your policy’s elimination period.

The cost of long-term care insurance

Long-term care premiums have tripled in the past decade or so, from $1,000 to $3,000 per year for the most basic of policies. In fact, overall costs for new long-term care coverage have jumped 9% in the past year, according to the Association of Long-term care Insurers (AALTCI). As with any insurance, the cost of your premiums will largely depend upon the choices you make. Selecting higher daily and lifetime limits or shorter elimination periods will factor into the pricing. If you decide to purchase inflation protection – a rider that prevents your benefits from decreasing in value as cost of living increases – you'll pay an additional premium. According to an AARP article on long-term care, Life Plans, an industry research firm reported that policy premiums in 2018 averaged $2,700 per year.

To put this into some context, the Government Accountability Office research shows that 70% of Americans 65 and older will require long-term care for at least three years – and of those, more than 20% will need it for five or more years. At the time of this writing, the national median for in-home care is just over $4000 per month and the costs of a semi-private room in a nursing facility is nearly $7500 per month. Clearly, for many, paying out-of-pocket for long-term care expenses could make a serious dent in their retirement savings.

Aside from the amount and type of coverage you want, the following factors will affect the cost of your policy:

Your health. The older you are, and the more health issues you have, the higher the premiums. Many companies have health screenings that look for risk factors related to heart disease, AIDS, and even some types of cancer.

Your age. If you apply for coverage too early, you’ll be paying a lot longer before you potentially need the care. Most advisors say the “sweet spot” for applying is between ages 50-55, but you’ll want to discuss your particular circumstances with your advisor.

Your marital status. Premiums are generally 30%-40% lower for married people because spouses often care for one another at home, decreasing the need for nursing facility benefits.

Your gender. If you’re a single woman, expect to pay as much as 50% more than a single man would because, statistically, you’re a higher risk and will likely need more benefits for a longer duration.

The issuing company. The same amount of coverage will be priced differently across companies. So, it’s important to compare quotes from different carriers.

It’s also important to note that premiums can go up after you buy your policy. In order to avoid financial strain from rate increases, some experts recommend spending no more than 5% of your annual income on a long-term care policy.

But don’t skimp to save a few bucks. Economist Lewis Mandell notes that there are levers you can push and pull to make a policy work for you:

“The cost of a policy that pays benefits for an unlimited amount of time is only about a third more expensive than a standard policy that pays for just three years of care. You can even pay for nearly a third of that added cost by increasing the elimination period on your policy from the standard 90 days to 180 days. Now you’re beginning to think like an economist—insure against the big losses you can’t afford and don’t sweat the small stuff.”

Most advisors suggest that it’s wise to start with a budget for costs you feel you can cover on your own, then work with your financial advisor to:

  • Explore your options for insuring the rest.
  • Research the cost of care in your state to help you hone your budget.
  • Fill in the details that are specific and right for you.

What if you never need the long-term care you insure for?

While it’s tempting to take a “use it or lose it” perspective on long-term care insurance, remember that premiums paid into any insurance policy (e.g. auto insurance) rarely equate to benefits paid out. Buying insurance is about the peace of mind you get from knowing you’re managing risk and protecting your assets.

In fact, new “hybrid” plans are attempting to address the fortunate problem of not needing to use your long-term care coverage. While traditional long-term care insurance costs about 75% less than the new hybrid plans, these new plans are purchased as whole life insurance and can be drawn from to cover long-term care expenses. And with the hybrid plans your rates never increase because you lock them in with an up-front investment – sometimes of more than $100,000, depending on the benefits. If you never file a long-term care claim, the policy is treated as life insurance and is left to your beneficiaries.

All that said, selecting a long-term care product is a balancing act. Your own health and your family’s health history factors prominently into your planning. Explore options with your advisor to find the approach that best fits with your overall retirement strategy.

Alternatives to long-term care insurance

As a recent AARP article on long-term care states: You might not need insurance, but you do need a plan. Hybrid policies (discussed above) aren’t your only alternative to traditional long-term care insurance. You might also explore the following, either individually or in combination:

Short-term care insurance. Although similar to long-term care policies, short-term care policies are capped at 12 months. They’re a less expensive option and may be available to seniors who are ineligible for traditional long-term coverage.

Long-term care annuities. Although they require a large up-front investment, these annuities often cost less, overall, than you’d pay in traditional long-term care insurance premiums.

Health Savings Account (HSA). If you have an eligible high-deductible health insurance plan, you can pay for your long-term care premiums through an HSA. Unlike your health insurance premiums, long-term care premiums are considered “health care expenses,” so you can use your tax-free HSA to pay for them.

Home equity. Your home equity might help you pay for long-term care needs through a line of credit, a reverse mortgage or, ultimately, selling the home.

Rider on existing life insurance policy. Rather than buying a new hybrid policy, you might be able to add a rider onto an existing life insurance policy. Costs and limitations will vary, so be sure to ask about up-front investment and how the policy pays out.

Working with an advisor who partners with more than one company for long-term care insurance policies will allow you to tailor your long-term care plan to meet your needs.

The time to apply is before you need it

Whatever you decide to do to manage the risk, experts all agree: Don’t wait until you need the coverage to make your plan. AALTCI’s website reports that even applicants younger than 50 are rejected about 20% of the time. Rejection rates go up from there. A frank conversation with your doctor about your health and family history will help you make some projections about health expenses for the future – all of which will guide a more fruitful long-term care planning session with your financial advisor.

Investing in a long-term care strategy is an important step in retirement planning, allowing you to more effectively protect your savings in case of illness or accident and empowering you to make choices about your care that otherwise might be left up to what you can afford to pay out of pocket. Even if you find you don’t need long-term-care insurance, exploring your options with a financial advisor is a valuable step toward removing the uncertainty.

Work with a financial advisor today to explore an investment in long-term care insurance.