A Guide to Long-Term Care: Protecting Your Future and Your Legacy
Planning for long-term care (LTC) is an essential part of securing your financial future, especially as you approach retirement. The high cost of care, combined with increased longevity, makes it crucial to have a strategy in place to cover these expenses—whether through insurance, savings, or a combination of both.
The Rising Cost of Long-Term Care: Why It Matters
Long-term care can be expensive. According to Genworth’s 2023 Cost of Care Survey:
The median annual cost of a private room in a nursing home is now over $110,000.
Assisted living facilities average $59,000 per year.
In-home care, such as a home health aide, costs around $62,000 annually .
These costs are expected to continue rising, making it essential for pre-retirees to develop a plan. Statistics show that 70% of people aged 65 or older will need some form of long-term care in their lifetime . Without a plan, the financial burden of care could significantly deplete your retirement savings.
Using an HSA to Fund Long-Term Care Expenses
A valuable tool for pre-retirees is the Health Savings Account (HSA). If you are enrolled in a high-deductible health plan, you can contribute to an HSA and build a dedicated pool of savings for future medical expenses, including long-term care.
The HSA offers three tax advantages:
Tax-free contributions, which lower your taxable income.
Tax-free growth on the investments within the account.
Tax-free withdrawals for qualified medical expenses, including long-term care services and premiums for long-term care insurance.
By funding your HSA now, you can accumulate savings that can be used tax-free for long-term care, helping you avoid dipping into your primary retirement funds.
When Should You Buy Long-Term Care Insurance?
While some people believe they can "self-insure" (i.e., pay for care out of their savings), long-term care insurance (LTCI) can be a smart way to preserve assets, especially for those who wish to leave a financial legacy for heirs. Without LTCI, even substantial retirement savings can be quickly depleted by long-term care costs.
Optimal Time to Purchase
Experts recommend purchasing LTC insurance in your mid-50s to early 60s, when premiums are more affordable, and your health is likely to qualify you for coverage. According to the American Association for Long-Term Care Insurance, purchasing at age 55 could result in premiums up to three times lower than buying at age 70 .
Waiting too long can also result in higher premiums or even disqualification due to health conditions.
Preserving Your Legacy: The Self-Insured Dilemma
Many individuals with significant assets believe they can “self-insure” by using their retirement savings to cover future long-term care costs. While this is possible for those with substantial wealth, it poses several risks:
Rapid depletion of assets: Without insurance, the cost of long-term care could quickly exhaust your savings, leaving little behind for your heirs.
Impact on spouse or family: Paying for care out of pocket may leave a surviving spouse with reduced income or assets, negatively impacting their financial stability.
Opportunity costs: Funds used for care could have otherwise been passed down to heirs or invested for further growth.
Purchasing LTC insurance, especially when you’re younger and healthier, can help preserve your assets for your heirs by covering the majority of care expenses, ensuring that your wealth is protected for future generations.
What to Look for in a Long-Term Care Policy
When considering LTC insurance, it's essential to find a policy that aligns with your financial situation and future needs. Key features to look for include:
Benefit Amount: The daily or monthly amount the policy will pay for care. Typical ranges are between $100 to $500 per day, depending on your coverage.
Benefit Period: How long the insurance will pay for care. Some policies provide unlimited coverage, while others may cap benefits at three to five years.
Inflation Protection: Given the rising costs of care, look for policies that include 3-5% compound inflation protection. This ensures that your coverage keeps pace with future care costs.
Elimination Period: The waiting period before benefits begin. A longer elimination period (such as 90 days) will lower your premium, but you will need to pay out-of-pocket during this time.
Common Pitfalls to Avoid
When planning for long-term care, there are a few common pitfalls to avoid:
Underestimating costs: Long-term care may be more expensive than anticipated, especially if you require care for many years. Make sure the daily benefit amount you choose matches the average cost of care in your area. For example, the cost of a nursing home can vary widely, from $50,000 to over $150,000 annually, depending on location .
Ignoring premium increases: Some policies may experience premium hikes over time. Be sure to ask about historical premium increases and build in flexibility for potential future hikes.
Overlooking hybrid policies: Hybrid policies combine LTC insurance with life insurance or an annuity. If you don’t use the LTC benefit, your beneficiaries will still receive a payout. These policies can offer flexibility and peace of mind, but they tend to be more expensive than standalone LTC insurance.
Conclusion: Protect Your Future and Your Legacy
The statistics are clear: long-term care is a significant expense for most retirees. By planning ahead, you can protect your assets, ensure you get the care you need, and preserve your legacy for your heirs. Whether you choose to self-fund through an HSA, purchase LTC insurance, or explore hybrid options, making these decisions in your 50s and early 60s can provide peace of mind for you and your family.
Sources:
Genworth. (2023). Cost of Care Survey. Link.
U.S. Department of Health and Human Services. (2021). Long-Term Services and Supports. Link.
American Association for Long-Term Care Insurance. (2021). Long-Term Care Costs and Statistics. Link.