As you near retirement, you may worry that the cost of long-term care can sabotage your future. Spending thousands of dollars a month on home health aides or an assisted-living facility can sink your retirement plans, especially if you need such care for many years.
In theory, a sensible solution is to buy long-term-care insurance. These policies help pay for at-home care, assisted-living communities or nursing homes.
In practice, however, these insurance products lack the scope of protection they used to offer. Many insurers have stopped selling long-term-care policies because misguided pricing and faulty underwriting standards led to high losses.
“The product that everyone wants no longer exists,” said Thomas West, senior partner at SEIA in Tysons Corner, Va. “Most of the long-term-care insurance on the market right now has priced itself out for people with modest assets. They can’t afford it.”
A 55-year-old male buying $165,000 of long-term-care benefits that kick in immediately (i.e., with no waiting period) could expect to pay about $900 a year for a barebones policy, according to the American Association for Long-Term Care Insurance. Adding an inflation guard to the policy that raises benefit levels by 3% a year would increase the premium to $2,100 annually. A 55-year-old female would pay $1,500 and $3,600 a year for the same benefits.
Keep in mind that the cost to renew a policy can increase substantially. Over the past two decades, some angry policyholders have protested after facing huge year-over-year premium hikes. To calm the public outcry, some insurers have scaled back the cost — and occasionally lowered their rates — while cutting back benefits.
Even if you can afford to buy long-term-care insurance, the coverage keeps shrinking. Many policies have longer waiting periods before benefits start. They may also come with lower monthly benefits, shorter benefit periods and fewer safeguards against inflation-driven cost increases for care services.
The obvious option is to bypass long-term-care insurance in favor of self-funding your potential need for long-term care. But given the unpredictable nature of long-term care, it’s tricky to know if you have enough savings now to pay out of pocket later.
“There are so many variables to consider,” said David Pierce, an assistant professor of insurance at the American College of Financial Services. Examples include your financial situation, life expectancy and medical history.
With so many unknowns, deciding whether to self-insure boils down to your risk tolerance and willingness to deploy your nest egg to cover your long-term care. Other considerations include wanting to provide an inheritance to your heirs or a charitable bequest.
“Let’s say you do have enough money to self-fund your long-term care,” West said. “Even though you can, is that the best, most efficient use of capital?” Buying a long-term-care insurance policy — or a hybrid life-insurance policy that also offers long-term care if the need arises — might enhance your estate planning.
If you choose to self-fund, make sure you’re able to stay the course. Just because you can afford to cover your potential long-term-care costs in the near future doesn’t mean you’ll have sufficient cash on hand 20 or 30 years from now.
Once you hit your 60s, you’ll want to develop a long-term-care plan. Whether you work with a financial adviser or crunch the numbers and weigh all the variables on your own, it helps to plot various scenarios and prepare for them.
Perhaps you can self-insure for a limited number of years before you deem the risk too great — or run low on funds. In that case, you’ll want to explore your options down the line. For example, will you sell your house and move into a senior living community or an accessory dwelling unit next to your adult child?
“If you rule out buying long-term-care insurance, we go back to scenario planning,” West said.
Jesse Slome, director of the American Association for Long-Term Care Insurance, raises another issue: If you self-insure and you need long-term care later, you may chafe at spending your own money to hire in-home help.
“The question is will you be willing to spend money to get the care you need,” Slome said. “Often, the answer is no. Some people say, ‘I’d never spend that much for an aide. This is ridiculous.’ Or you’ll be looking for cheaper care, for a bargain, so you’ll access long-term care slower” than if you had insurance to pay it.
Slome, 70, argues that retirees with long-term-care insurance get care “sooner and faster” and often have more options to choose from. He cites yet another variable that can affect your decision whether to self-insure for long-term care: new drugs that promise to slow the rate of progression of dementia in some patients.
“Dementia is the No. 1 reason that people might need long-term care,” he said. If the next decade brings major advances in treatments that delay the onset of mid- or late-stage dementia, you may squeeze in a few more years of relative self-sufficiency — and thus save at least some money that you’d otherwise need for long-term care.
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