4 Myths of Long-Term Care
Today, Americans live longer, which means we must address long-term care costs when considering retirement planning.
In 1950, the life expectancy for men was 67 years, and 72 years for women.1 Today, according to the Social Security Administration, a 65-year-old person can expect to live an additional 19 to 21 years on average. What’s more, the Social Security Administration says that a quarter of 65-year-olds will live to age 90, and one in 10 people will live beyond age 95.2
Living longer is undoubtedly good news, but only if we have a financial strategy that accounts for a retirement that could last 30 years or more and includes solutions for potential long-term care needs.
Now that we’ve acknowledged that Americans are living longer than ever, let’s talk about the cost of care and the potential financial impact it may have on your savings.
Long-term care costs
The cost of care has been increasing year after year, and 2020 was no exception. COVID-19 had major impacts on long-term care costs., increasing the cost of care by 6.15% in one year. A recent study conducted by Genworth found factors like labor shortages, equipment costs, regulatory changes, employee recruitment and retention, wage pressures, and supply and demand to be a large contribution to this inflation.4 On average from 2004 – 2020, cost of care costs has increased an average of 1.88% – 3.80%. With in-home care being an extremely popular option, especially in recent years, we saw the median annual price rise to $54,912, an increase of $4,576 from 2018’s median cost of $50,336.
Let’s focus a moment on this 5th bullet point. Costs are increasing at 3 to 4% a year, meaning in 20 years, these numbers could more than double. If something happens to you or your spouse or both of you, it will cost you much money. Without a plan in place, long-term care can quickly drain one’s life savings.
What is long-term care?
With so many misconceptions and assumptions surrounding long-term care, it’s essential to be clear on what we mean by long-term care. Long-term care encompasses a variety of services that include the need for both medical and non-medical assistance.
Typically, long-term care is associated with any personal or medical assistance an individual may need to accomplish the Activities of Daily Living or ADL’s.
These activities include things like bathing, dressing, continence and toileting, eating, transferring/moving from seated to standing, and getting in and out of bed.
When thinking of long-term care, people typically think of nursing homes and skilled nursing care. However, the majority of long-term care services are provided at home, in adult day health facilities, or assisted living facilities.
Now that we’ve established what long-term care is and the complex reality of long-term care costs, let’s dive into four long-term care myths.
Myth #1: “It won’t happen to me.”
Few people want to face their own mortality, and it’s human nature to think that bad things are more likely to happen to others than to yourself.
So, it’s unsurprising that most people don’t consider long-term care at all. In fact, a recent long term care study conducted by AP-NORC at the University of Chicago found that about half of those 40 and older lack confidence that they will have the financial resources to pay for the care they will need when they get older and between 2013 and 2018, only about a third of those age 40 and older say they have set aside money to pay for long-term care expenses5
Furthermore, According to a 2017 Long-Term Care Marketing and Thought Leadership Research Survey conducted by Versta Research on behalf of Lincoln Financial Group, only 14% of Americans have talked with a financial professional about how they would pay for long-term care. 6
Denial is powerful and can be detrimental in retirement planning. The reality is that whether you live a long, healthy life or are likely to get sick due to an unhealthy lifestyle, chances are, you’ll need long-term care either way.
Most people will need long-term care at some point in their lifetime.
Myth #2: “Medicare, Medicaid, and Private Insurance will cover these costs.”
Many people think that health insurance, Medicare, or Medicaid will cover their long-term care needs. However, this is not the case.
Medicare doesn’t provide long-term care coverage. In fact, Medicare typically only covers a portion of skilled nursing facility costs for up to 100 days. A qualifying hospitalization must occur first to activate this benefit. Also, it only provides limited amounts of coverage for certain types of home care.
What about Medicaid? Medicaid only provides long-term care benefits to people with limited income and assets. If you are considering this option, you would need to spend down assets, including real estate and annual income to position yourself in a way that demonstrates your need for government support. In addition, there are limits on the number of assets a spouse can own and the amount of income you can earn. When assets are spent down, it creates tax exposure.
When looking at Employer-Sponsored Plans and Private Health Insurance, they cover the same kinds of limited services as Medicare. If they offer long-term care services, it is typically only for skilled, short-term, and medically necessary care.
Myth #3: “I plan to self-insure, so I’m good.”
Many people think they will be able to cover long-term care costs out of pocket. However, as you’ve seen today, long-term care costs can cause people to draw down their savings much faster than anticipated. You have worked hard to prepare for retirement, and likely, you have spoken to a financial professional about a strategy. However, if a plan for LTC hasn’t been included, your retirement strategy is at risk.
Accessing funds to pay for insurance and long-term care costs can be taxable events – further reducing your retirement funds.
Of course, there is the added stress that comes with trying to figure out how to pay for medical expenses while being in a vulnerable situation.
Also, it is important to consider how an event like this would impact a healthy spouse. If all your retirement funds are being diverted to medical expenses, what is the remaining spouse going to use to live on?
This is why it is essential to plan ahead.
Myth #4: “My family will care for me.”
In past generations, spouses and children often took care of their loved ones when they were ill.
It’s easy to assume that family will care for a loved one’s needs without considering the specifics. While millions of Americans do so today, it is crucial to assess the impact of providing care. If we set the financial burden aside for a moment, there are still many other considerations to weigh, such as the effect on careers, personal lives, and family dynamics.
According to the Genworth Circle of Care Beyond Dollars Summary conducted in 2015:
• 1/3 of caregivers surveyed provided 30 or more hours of care per week. Half of those who do so estimate that they lost around 1/3 of their income.
• 77% of caregivers missed time from work.
• 43% said that providing care impacted their personal health and well-being.
• 41% of caregivers experienced negative physical side effects such as depression.
• 33% of caregivers reported an extremely high level of stress.
It is also imperative to consider the full extent of providing or having care provided by a loved one. Consider the physical strain of lifting, bathing, and helping with activities of daily living. Is this something you are physically and emotionally prepared to do or have your spouse or child do for you?
What are my options for long-term care?
There are several options for you to consider! Traditional long-term care insurance is designed to cover long-term services, including personal and custodial care in various settings such as your home, a community organization, or other facilities. Touted as one of the most comprehensive resources available for long-term care, they are also the most expensive. Additionally, traditional long-term care policies have been plagued with premium increases stemming from the rising cost of healthcare affecting our nation. These policy premiums will likely continue to rise. You have to medically qualify for coverage, and if you can no longer afford the policy and cancel, you lose all of the money that you’ve put into it.
Lastly, some people dislike traditionally long-term care because of the “use it or lose it” mentality. If you never need this type of protection, this is excellent news, but you do not get your paid premiums back in return.
Another option is annuities with LTC-related riders. Annuities tend to be much less expensive than stand-alone LTC products, and some offer tax incentives for long-term care benefits. There are products available which allow you to take the premiums you’d pay for LTC and apply them towards a fixed income while providing higher payouts should you require long-term care. If you don’t need the LTC benefits, the full value of the annuity can be used by yourself or your beneficiaries.
Typically, to receive these benefits, you must first spend down the full annuity contract value. There are usually additional fees associated with the purchase of this rider. Also, keep in mind that any withdrawals will reduce the LTC benefits as well as the death benefit.
Next is life insurance with an accelerated death benefit, which can be used for qualified long-term care needs. If the insured needs qualifying in-home or nursing home care, they are able to receive accelerated benefits – meaning that they can pull the money from their life insurance policy for these expenses. This means the death benefits of the policy are reduced by what is received for long-term care coverage. These policies provide multiple advantages – an income tax-free death benefit, income tax-free cash value, and the opportunity for an accelerated death benefit. You may have to medically qualify for coverage when the policy is issued, and there are usually additional premium requirements with the purchase of this additional rider.
Finally, we have a life insurance/long-term care combo. This is a life insurance policy with long-term care benefits built into the policy with an additional cost for these benefits. These products are typically more comprehensive than an accelerated benefit rider. You still have a tax-free death benefit and the opportunity to build cash value along with the addition of long-term care benefits. This type of solution typically involves separate underwriting for the life insurance and the LTC protection, so it is possible to qualify for the life insurance but not for the LTC benefit.
Each alternative has pros and cons. The decision about which solution is most appropriate for you should be based on your unique situation. Need help coming up with a solution? Schedule a meeting with us to go over your retirement strategy and ensure you’re equipped for potential long-term care costs.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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