4 Ways to Plan For Long Term Care

July 30, 2014

According to the American Association for Long-Term Care Insurance, over 70% of long-term care insurance policies are applied for after age 54. Maybe it happens after the kids leave the nest or perhaps when other goals like retirement are realized but I believe most people don’t start thinking about long-term care until they’ve experienced it through someone else.  I’ve had my share of experience dealing with long-term care but my most recent encounter with Patty Smith (name changed to protect the innocent) has made me realize why it is so important to plan for long-term care before it is too late.

Patty and Stan Smith never worried much about money during Stan’s years as a professional athlete and even after his professional career was over, the Smith’s enjoyed a comfortable lifestyle living in the suburbs of a large metropolitan city. Between pension and Social Security benefits, the Smith’s had over $3,000 a month in retirement income and it seemed like more than enough, especially after paying off their mortgage. Patty always trusted Stan’s decisions when it came to their finances but even she was a bit leery when Stan decided to refinance the home years later to make some home improvements.

Eventually, Stan’s health began to deteriorate and soon it was not safe for Stan to remain at home. Patty found a facility suitable for Stan’s care but the limited retirement income was not enough for Patty to pay for Stan’s care and still maintain their home. In order to continue paying for Stan’s care, Patty stopped making payments on the home loan and after months of missed payments, she received a notice of foreclosure.

Since then, the cost of Stan’s care has risen to over $5,000 a month.  Given their limited income, Patty has had to spend down their savings in order to qualify Stan for Medicaid assistance.  Unfortunately, new laws that went into effect this year have delayed the application process and if the application is not approved soon, Stan will have to be transferred to another less desirable facility. For now, all Patty can do is wait.

No one hopes or expects to be in this situation but sadly, this story is playing out for tens of thousands of families every year. According to the Genworth 2014 Cost of Care Survey, the median rate for an assisted living facility is $3,500 a month and the median rate for nursing home care is over $200 a day. As the cost of care continues to rise, the likelihood of not having enough money to pay for care increases.  Here are four ways you can prepare for long-term care expenses:

1.  Buy long-term care insurance

LongTermCare.gov defines long-term care insurance as insurance “designed to cover long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.”  I think the easiest way to think about it is to relate it to your car insurance.  You pay insurance premiums every year for car insurance, yet you hope you never have to use it (because that means you’ve had an accident or some other unfortunate event).  In the same way, if you purchase long-term care insurance, you pay annual premiums hoping you never have to use the benefits (because that would mean you needed custodial care).

Now, that might be oversimplifying it a bit but the bottom line is that you can insure against the risk of needing long-term care later in life.  There is a lot more that goes into determining whether or not long-term care insurance is right for you. To learn more, visit http://www.iii.org/insurance-topics/long-term-care-insurance.

2.  Purchase a longevity annuity

Critics of long-term care insurance claim that it’s a bad deal because it only covers long-term care, insurers can increase premiums, and claiming benefits can be a hassle.  Instead, some favor using longevity annuities that pay a guaranteed income for the life of the annuitant.  Income benefits are typically paid once the annuitant reaches a certain age, usually 80 to 85, which is when most long-term care insurance claims are filed. The policy does have its drawbacks—you have to pay a large premium upfront and there may be no residual value after the annuitant dies—but as healthcare improves and people live longer and more productive lives, these types of policies seem to be making a comeback.

3.  Use life insurance

One of the biggest concerns about purchasing long-term care insurance is the fear that policyholders may die before they receive benefits so insurance companies have created life insurance products that contain living benefits designed to pay a benefit either during the policyholder’s lifetime or after.  The upside to using life insurance to help pay for long-term care is the certainty that a benefit will be payable to someone at some point in the future. The downside is that the policy may not pay as much in long-term care benefits as a pure long-term care insurance policy.  See http://www.aaltci.org/long-term-care-insurance/learning-center/life-insurance-ltc-benefits.php for things to consider before using life insurance for long-term care.

4.  Self Insure

Purchasing insurance or an annuity may be right for some people but for younger investors that are planning ahead, Manisha Thakor thinks you should skip the insurance and self insure. A person who self insures is basically earmarking a portion of their wealth for potential future long-term care expenses.  The benefit to this approach is that it may be less expensive, the assets can be used for any purpose, and if you don’t have long-term care expenses, you still have assets that can be transferred through your estate.  On the flip side, if you require long-term care earlier than expected or if your investments don’t perform as well as you had hoped, then you may not have as much as you had planned to cover these expenses.  As with all of these options, there are other things to consider before taking this approach.

Regardless of which option you choose, the worst thing you can do is nothing at all.  Don’t wait for a close encounter before you plan for long-term care.  The sooner you start planning, the less likely you’ll end up in a situation like Patty’s.