The U.S. Department of Health and Human Services estimates that 70% of people will need long-term care at some point in their lives. The Robert Wood Johnson Foundation reported this year that 40% of those turning 65 will have need two or more years of long-term care, and 43% of those receiving long-term care are under 65. Despite these facts, the vast majority of Americans have not planned for this very likely expense. Many are under the misconception that their health insurance or Medicare will cover it. In fact, Medicare only covers a narrow range of costs. While it will pay for medically necessary skilled care, the choice of setting is limited, and it will not pay for assistance with daily tasks, such as cooking, cleaning, and personal care. Medicare provides no funding for assisted living facilities. Private health insurance generally does not cover long-term care costs. Providing for long-term care has become a critically important, but still widely overlooked, aspect of financial planning.
Long-Term Care Insurance
Fewer than 8% of Americans have long-term care insurance. This is not surprising, given the rapidly rising cost of these policies and limited benefits they may provide. In 2010, a policy for someone under 55 cost an average of $1831 annually. Long-term care insurance gets more expensive with age; for those 75 and older, the cost was $4123. If that seems expensive, bear in mind thatUSA Today reported premium increases of 30-50% over the past five to seven years. Despite these high costs, there is also a significant risk that your premiums will gain you no benefit whatsoever. The most obvious risk that you will have no need of long-term care in your lifetime. What many people don’t consider is that in the event that they do need long-term care, it may not be accessible. A patient may purchase a long-term care policy, but if they become incapacitated, whoever takes charge of their affairs may not know that the policy exists or how to access benefits. Many long-term care policies have gone unused even when needed due to a simple lack of communication with family members about the subject.
Long-term care insurance may still be a sound option for some, depending on their income, assets, health, and care preferences. Speak to your financial advisor or insurance professional about this option early – preferably in your late 40s to mid 50s – to get access to lower rates. Also, be sure to inform your family of any policy you purchase so they can use it to fund your care in the event that you are unable to manage your own finances.
Fortunately, these types of policies are not the only way to prepare for long-term care costs. Financial advisors and insurance professionals are suggesting creative ways to minimize the cost and enhance the benefits associated with providing for long-term care.
Life insurance policies are available that can provide access to much of the death benefit for the purpose of long-term care, in the event it becomes necessary. If no long-term care is needed, or if only a portion of the death benefit is paid out for care, then all or the remainder is paid to the beneficiary at the time of death. This limits the inherent risk in long-term care policies of paying premiums for a benefit you may never use.
Cash for Life Insurance
Some life insurance policies offer a cash value that can be accessed via withdrawals or loans, which can be used to pay for long-term care costs. Another option may be to sell the life insurance policy (a “life settlement option”). In some cases, this may yield significantly more money than taking the cash value of the policy. A version of this is called a “viatical settlement,” or sale of the policy when the policyholder is terminally ill. The proceeds of viatical settlements are generally tax free.
Annuities can provide guaranteed income, which some investors use to fund general retirement expenses. This can also be an effective and tax-efficient way of preparing for long-term care costs. Annuities are complex financial products, however, and take a variety of forms. Speak with your financial advisor about the options available. Be sure to understand the differences among fixed, variable, and indexed annuities, as well as between immediate and deferred annuities. Read our recent blog post, “Pros and Cons of Annuities for Retirement Income,” for more information.
Boelman Shaw Capital Partners provides comprehensive tax and financial planning services for our Des Moines area clients. Give us a call to start exploring your options for long term care protection, retirement planning, or meeting your other financial goals.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.