Do I Need Long-Term Care Insurance?
Long-term care is one of those retirement expenses that is easy to overlook—until you or someone you love needs it.
According to the U.S. Department of Health and Human Services, someone turning 65 today has nearly a 70% chance of needing some form of long-term care services and support during their remaining years. The potential need for care is significant, but so is the potential cost.
This raises an important retirement planning question: Do I need long-term care insurance?
The answer isn't the same for everyone. Your assets, income, family situation, health, and ability to absorb a large unexpected expense can all influence whether long-term care insurance makes sense.
What Is Long-Term Care?
Long-term care refers to services designed to help individuals who can no longer independently perform certain activities of daily living. These commonly include:
Bathing
Dressing
Eating
Toileting
Transferring, such as getting in and out of a bed or chair
Maintaining continence
Long-term care can be provided in several settings, including your home, an assisted living facility, an adult day care center, or a nursing home.
Importantly, long-term care isn't necessarily medical care. Someone may be relatively healthy from a medical standpoint but still need assistance completing everyday activities because of physical or cognitive limitations.
How Much Does Long-Term Care Cost?
The cost of long-term care can vary significantly depending on where you live and the type of care you require.
Home health aides and assisted living facilities can cost thousands of dollars per month, while a private room in a nursing home can cost well into six figures per year in certain parts of the country.
These expenses become even more concerning when you consider that care may be required for several years.
For example, assume someone requires nursing home care costing $150,000 per year. A three-year stay could result in $450,000 of expenses, before accounting for future increases in the cost of care.
For a married couple, there is also the possibility that both spouses will eventually require some form of care.
This is why long-term care isn't simply a healthcare consideration. It's also a retirement planning risk.
Doesn't Medicare Pay for Long-Term Care?
This is one of the most common misconceptions surrounding long-term care.
Medicare generally does not pay for ongoing custodial long-term care. Medicare may cover certain short-term skilled nursing or home health services when specific requirements are met, but it should not be viewed as a solution for several years of custodial care.
Medicaid can cover long-term care for eligible individuals, but it is a means-tested program with financial eligibility requirements.
That leaves many retirees with three primary ways to fund long-term care:
Pay for care using their own assets.
Purchase insurance to transfer some of the risk.
Use a combination of personal assets and insurance.
Determining which strategy makes the most sense should be part of a broader retirement plan.
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How Does Long-Term Care Insurance Work?
Traditional long-term care insurance is designed to pay benefits when you meet the policy's eligibility requirements.
Policies can differ considerably, but several important features typically determine your coverage.
Daily or monthly benefit: The maximum amount the insurance company will pay toward qualifying care.
Benefit period: The length of time benefits may be available or the total pool of money available under the policy.
Elimination period: A waiting period that generally must be satisfied before benefits begin.
Inflation protection: A provision that allows your available benefits to increase over time to help account for rising care costs.
A policy doesn't necessarily need to cover every dollar of future care. In many cases, insurance can be designed to cover a portion of the risk, with retirement income and personal assets covering the remainder.
Who Should Consider Long-Term Care Insurance?
Long-term care insurance can be particularly valuable for households that have accumulated meaningful retirement savings but don't have enough wealth to comfortably absorb several hundred thousand dollars of unexpected expenses.
Suppose a couple retires with a $1.5 million investment portfolio. A prolonged long-term care event costing hundreds of thousands of dollars could materially alter their retirement plan and potentially reduce the assets available to support the healthy spouse.
Insurance could help transfer a portion of this risk to an insurance company.
Long-term care insurance may be worth considering if:
You have assets you want to protect.
A significant long-term care expense could disrupt your retirement plan.
You want to reduce the potential financial burden placed on your spouse or children.
You want greater flexibility in how and where you receive care.
You have sufficient cash flow to comfortably afford the premiums.
However, purchasing insurance solely because you are worried about needing care isn't necessarily the right decision. The cost and benefits of the policy should be evaluated alongside your overall financial situation.
Who May Not Need Long-Term Care Insurance?
There are situations where purchasing long-term care insurance may not make financial sense.
At one end of the spectrum are individuals with relatively limited retirement assets. Paying substantial premiums for decades could put additional pressure on their retirement cash flow, while Medicaid may ultimately play a larger role if their assets are depleted and they otherwise qualify.
At the opposite end are households with substantial wealth.
Someone with a $10 million or $20 million investment portfolio, for example, may determine that they can comfortably self-fund several years of care without jeopardizing their retirement or estate planning objectives.
Between those two extremes is where the decision often becomes more complicated.
A household with $1 million, $2 million, or $3 million saved for retirement may have substantial resources, but a prolonged care event could still have a meaningful impact on their financial plan.
What Does It Mean to Self-Fund Long-Term Care?
Self-funding means deciding not to purchase insurance and instead planning to pay for care from your own resources.
Those resources might include:
Social Security
Pension income
IRA and 401(k) withdrawals
Brokerage accounts
Cash reserves
Home equity
Other investments or income sources
Self-funding can make sense when a household has sufficient assets and income to absorb a significant long-term care event without jeopardizing its other financial goals.
But the decision shouldn't simply be, "I have enough money to pay for it."
The better question is:
What would happen to the rest of my financial plan if I had to pay for several years of care?
That's especially important for married couples. Spending hundreds of thousands of dollars on one spouse's care could leave fewer assets available to support the surviving spouse for the remainder of their retirement.
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What About Hybrid Long-Term Care Insurance?
Traditional long-term care insurance isn't the only option available.
Some insurance policies combine long-term care benefits with life insurance or an annuity. These are commonly referred to as hybrid policies.
For example, a life insurance policy may provide long-term care benefits while you're alive and a death benefit to your beneficiaries if the long-term care benefits aren't fully used.
These policies can address one concern some consumers have with traditional coverage: paying premiums for years and potentially never using the benefits.
However, hybrid policies have their own costs, limitations, and trade-offs. They shouldn't automatically be viewed as better than traditional long-term care insurance simply because they provide multiple potential benefits.
When Should You Buy Long-Term Care Insurance?
Waiting until retirement to think about long-term care insurance can be a mistake.
Your ability to purchase coverage—and how much it costs—can depend heavily on your age and health when you apply.
Applying earlier may result in lower premiums and a greater likelihood of qualifying medically. However, purchasing coverage too early can also mean paying premiums for many additional years before you're likely to need care.
For many people, their 50s and early 60s can be an appropriate time to begin evaluating their options.
The important word is evaluating. You don't necessarily need to purchase a policy simply because you've reached a certain age.
Don't Evaluate Long-Term Care Insurance in Isolation
The decision to purchase long-term care insurance should be based on more than an insurance quote.
Ideally, you should model what would happen to your financial plan under different scenarios.
For example:
Scenario 1: Neither spouse requires significant long-term care.
Scenario 2: One spouse requires three years of care.
Scenario 3: Both spouses require care at different points during retirement.
You can then compare the projected impact on your retirement assets with and without insurance.
This changes the question from:
"Do I think I'll need long-term care?"
to:
"If I need long-term care, can my financial plan handle the cost?"
That's a much more useful question.
So, Do You Need Long-Term Care Insurance?
There isn't a universal answer.
Long-term care insurance may make sense if a substantial care event could threaten your retirement security, reduce the assets available to your spouse, or force your family to make difficult financial decisions.
On the other hand, you may be able to comfortably self-fund care or determine that the ongoing cost of insurance isn't appropriate for your financial situation.
Ultimately, long-term care planning is about managing risk.
You don't know whether you'll need care, how long you'll need it, or what it will cost decades from now. What you can do is understand the potential financial impact and develop a plan for addressing it.
Whether that means purchasing insurance, self-funding, or combining the two, having a strategy in place before you need care can help protect the retirement plan you've spent decades building.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast