Retirement Income Planning with Long-Term Care Coverage

Retirement Income Planning includes more than investing your savings for growth so they can be converted into a paycheck to cover your expenses. A thorough look at each type of expense over time and how it will be covered is another component of a financial plan. Let us look at planning for Long-Term Care Coverage.

First, what is “Long-Term Care?”

Somehow, long-term care is something we avoid talking about, even in the context of financial planning for retirement. And talk about it we must, as this conversation involves your future security! According to the US Department of Health and Human Services (HHS) 70% of persons over 65 will need some form of long-term care coverage to help in case of a Nursing Home stay, or a period of prolonged recovery in your home, as this will provide you with a comfortable level of future assistance.

HHS defines long-term care as “a range of services and supports you may need to meet your personal care needs”.  Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs), such as bathing, dressing, or eating. Other common long-term care services and supports are assistance with everyday tasks, sometimes called Instrumental Activities of Daily Living (IADLs) including, housework, managing money, shopping for groceries or clothes, using the telephone or other communication devices, caring for pets, etc.

Who Pays for Long Term Care? 

People often assume that Medicare or Medigap, or even regular health insurance will absorb the cost of elderly care expenses, and unfortunately, that is not the case!  Long-term care is paid first with an individual’s own assets. Medicare will only provide resources for elderly care, at the point when all other financial resources are exhausted. Moreover, Medicare as a plan for long-term care would only be for those who otherwise do not have any wealth assets, since your personal funds are used first.

Planning for Long-Term Care

Ensuring that there are resources available to pay for the various costs of elderly care is a crucial component of financial planning for retirement. Perhaps one of the difficulties in addressing long-term care is that the level and duration of care needed is unpredictable and thus difficult to plan. When will we need care? For how long will we need it?  What level of care/help will we need?  These are all difficult if not impossible to know, except for the fact that 70% of us will need elder care help at some point after the age of 65.

This highlights WHY we need to plan for long-term care, so that when it is needed, the resources will be there and your needs will be covered. This is best done as part of standard retirement planning. Fortunately, there are many financial strategies and products available to provide coverage for this potentially very expensive need.  Including a LTC solution that fits within your financial plan will help ensure your financial security and will give peace of mind to you and your loved ones.

Long Term Care Insurance Products

There are a variety of long-term care insurance products each with a specific purpose and value proposition. They provide the financial resources necessary to pay for long-term care expenses not covered by medical insurance. Since elder care expenses can add up to substantial amounts over time, having a policy to cover at least a portion of these expenses allows you to preserve your life’s savings for other purposes, including any legacy wishes. An important consideration for many is the general tax-deductibility of long-term care insurance premiums within the limits of the IRS rules. A key feature of several new LTC policies is a “return of premium”.  This feature enables policy owners and beneficiaries to recoup funds spent on the policy but not used by the insured.

Most would consider long-term care insurance to be expensive, however early planning can greatly reduce its costs. Since 70% of US residents will need some form of elder care, planning for this expense at an early age can greatly reduce the cost of coverage. It is crucial to bear in mind that by sharing the cost of long term care expenses with an insurance company that offers the “return of premium” feature, one can substantially reduce the ultimate cost of elder care. This is due to the effect of the “insurance multiplier”. The insurance premium paid will most likely be a small portion of what the insurance company will eventually pay to cover elder care expenses. Elder care expenses for a homebound person average $60,000 per annum. Much elder care is provided by loved ones who must stop working to provide care. The right policy will pay a relative or a professional for providing this care.

Originally, 20 to 30 years ago, long-term care insurance products were of the “use it or lose it” variety – premiums were paid over many years and if death occurred prior to collecting any benefits the insurance had no remaining value. Today, however, long-term care insurance products are structured very differently such that significant value remains in the event the insurance is not needed for long-term care expenses. This might be a simple return of premium for the insured, a death benefit for heirs, or it could be an income annuity available to be collected at a certain point of time in the policy’s life. The new policies offer greater flexibility and benefits. The goal is to ensure funds will be available for your use and if not needed, they will be returned to your family.

Selecting the Right Strategy for Long-Term Care Coverage

The process begins with a review of your family history to determine longevity, potential future ailments, and a projection of both medical expenses and potential long-term care expenses. Persons who have experienced the cost of caring for an elderly loved one understand the importance of considering this probable expense in a financial plan. Most persons are surprised by the high projected costs of elder care. The next step is to determine what type of care you may need and where you would like to be cared for. Finally, the question of how much care can you afford becomes the key driver in the analysis. As a Certified Retirement Income Planner, I can help you through the process of assessing probable elder care needs and identifying sources of funding for that expense. In my experience, self-insuring is possible but unrealistic. Insuring for a portion of elder care expenses is wise. Based on your personal assessment, I can help you review the various types of policies and features that are suitable for your desired coverage, the type of benefits that would be best for your family and how this will fit in your overall financial plan.

I have a preference for products that offer solutions for a family’s insurance needs, and also provide flexibility to access the funds if the coverage is no longer needed. For example, life insurance can be a valuable financial product to protect a person’s dependents when they are young. As life continues and children grow, the need for life insurance diminishes, but the need to cover the expenses of elder care, or other health issues becomes more important. Selecting a life insurance policy at an early age that will also provide benefits for the insured at a later age is a perfect example of products that offer flexibility by covering several financial needs over time.

Another example of flexibility in a policy is life insurance with an LTC rider. These types of insurance policies allow the insured to “borrow funds” (get an advance) from the death benefit and use them to pay for elder care expenses. The “borrowed” funds are usually tax free. The net effect is that the policy owner benefits from his/her own life insurance policy and whatever is not used goes to the heirs.

How expensive are these policies? The cost of a policy is a function of the age of the insured, the benefits offered by the policy, how long benefits will be paid out, and if the benefits will grow over time. Another factor in the cost of life and long-term care insurance is the health of the person seeking coverage. Persons that are very healthy may be surprised to learn that they qualify for life insurance but are not able to get long term care benefits due to early onset of nagging conditions, such as arthritis.  Considering this coverage early is wise.

In addition to looking for policies that can benefit more than one family member, I am partial to policies that offer a “return of premium” feature. This allows families to recover the funds paid for a policy after the policy has been in place for a certain number of years. I also believe that a policy does not need to cover all of the projected elder care expenses. Insurance can be used for a portion of the expenses, for example, one to three years of projected LTC expenses. Having the policy will provide some peace of mind that coverage is available and will allow for a more enjoyable retirement.

Finally, just as you plan for retirement income for other purposes such as housing, travel, or a legacy gift for your loved ones, your elder care needs must be included in your retirement income planning. It is a potentially large expense that someone will have to pay because it is not covered by Medicare or health insurance. If you do not prepare for it, your children may be burdened with it. Is this the legacy you would like to leave for your loved ones?

Finally, just as you plan for retirement income for other purposes such as housing, travel, or grandchildren, your long-term care coverage needs should be assessed within the context of your retirement income planning in general.