Pamela Zedick, CFP®
There are a lot of things you don’t want to gamble with in life, like your retirement savings, your income, or your health. Unfortunately, many Americans take one particular risk with their health, possibly without even realizing it, and that’s neglecting to make a long-term care plan. (1) Since 70% of people will need some form of long-term care during their lifetimes, it’s critical to have a plan to pay for these costs. (2)
When you are healthy and thriving, it’s easy to focus solely on building your savings to provide for your basic retirement expenses and forget about the potential need for long-term care. But no matter what your health looks like today, creating a long-term care plan now will empower you to research your options and choose strategies that are the best fit for you.
Long-term care costs are so high that they could potentially wipe out a bulk of your retirement funds. On average nationally, it costs $280 per day or $8,517 per month for a private room in a nursing home. (3) To make matters worse, because of their longer life expectancy, women pay significantly more than men for long-term care. The average amount of time women require long-term care for is 3.7 years (or around 44 months), adding up to $374,748 in expenses in today’s costs for that private room. (4) For men, who need long-term care for an average of 2.2 years (or around 26 months), that equals $221,442.
And costs are only projected to increase. From 2019-2020, the median annual cost for home health aides rose over 4.5 percent. (5) By 2030, the average cost for long-term care services is expected to double. (6) These costs can vary based on the level of care and amenities needed, as well as the size of the room and the location, so your first step in making your own long-term care plan is to decide what type of care you prefer.
If you have a family history or early signs of Alzheimer’s or dementia, or if you suffer from a chronic disease that will require ongoing care or daily assistance, look into facilities that offer the care you’ll need, and share your thoughts with your family. Would you prefer to live in a nursing home or would you like nurses and assistants to come to your residence? Do you want a religious community of care? There are several preferences to take into consideration when considering your long-term care plan.
Having the option to make these choices yourself lends much-needed autonomy to your long-term care plan. If you wait until you need it, you may not be in good enough health to make the decision, or the size of your savings might determine the care you receive. Whether you’re worried about potential health concerns or want to protect your hard-earned wealth, it’s important to understand the long-term care insurance options available to you and whether or not a policy makes sense for your lifestyle and needs. It also helps alleviate the burden on your kids if you have a plan in place.
Long-term care coverage isn’t cheap, but it pales in comparison to long-term care costs. Here are some options to consider when creating your long-term care strategy.
With traditional long-term care insurance, you pay a premium in exchange for the ability to receive benefits if they are needed. If you need long-term care at some point, the policy provides you with money to pay for it. If you never need long-term care, then you receive no benefits. It’s a “use it or lose it” policy.
Just like any insurance policy, you will have some coverage choices to make.
You can choose the level of insurance you want and select the daily benefit amount for care in a nursing home. You can also add home-care coverage if that is a priority for you. In order to choose the right coverage amounts, you need to know what the cost of long-term care looks like in your state. For example, a private room at a nursing home in California will cost an average of $10,646 a month, and hiring a home health aide could set you back over $64,000 for the year.
You must also decide on the length of time you want the benefits to be paid. Common options are one, two, three, or five years, or for your lifetime. Logically, the longer the benefit period, the higher the premiums you will need to pay.
Your policy will also indicate “benefit triggers,” or conditions which must exist in order to receive benefits from the insurance company. A tax-qualified plan only pays benefits once you are unable to perform two of six activities of daily living without substantial assistance for at least 90 days, or have a cognitive impairment like Alzheimer’s. Non-tax-qualified plans may have less-restrictive benefit triggers.
If you want, you can have your benefits increase with inflation to match future care costs. It is also important to note that premiums can increase as they are not usually set in stone.
With a traditional long-term care policy, people sometimes feel that if they buy it and don’t use it, they have wasted their money. Because of this, several hybrid products have emerged. One very popular solution is a life insurance policy with a long-term care rider. This strategy is enticing because if long-term care is needed, the funds are available through your policy’s death benefit. If you don’t spend the total benefit available, your beneficiaries will receive the balance upon your death (tax-free), thus no wasted money.
If you need life insurance, getting your long-term care coverage as a rider may be a good option. This way, someone will be benefiting from the premiums you are paying, whether it is you or your heirs. Plus, because the policy accumulates cash, the insured individual can access it if needed, allowing them to recoup a portion or all of their premiums. This type of policy involves permanent life insurance which, of course, has higher premiums than term insurance. The long-term care rider increases the premium further.
If you don’t need life insurance, another combination product may be better suited to your situation. If you purchase a fixed annuity, you may have the alternative of adding a long-term care rider onto the contract for an additional cost. Since 2010, the IRS allows for the long-term care portion to be used tax-free. (7)
After purchasing the annuity, you would select the amount of long-term care coverage you want, often two to three times the face value of the annuity, as well as the length of time you want coverage. Finally, you have to decide if you want inflation protection.
This option makes money available to you if you need long-term care. Otherwise, if you have not annuitized, you can cash out the annuity when it matures (in which case you would lose your long-term care coverage) or let it accumulate and ultimately pass on the assets to your heirs.
Obtaining long-term care coverage through an annuity can be appealing because it is generally less expensive than stand-alone insurance and you can receive coverage without medical underwriting. Annuities tend to be less common than the other choices, though, because of the current low interest rates available from the annuity and the large up-front investment.
Consider starting a savings plan specifically for future healthcare needs. One option is to create a separate, high-yield savings account and contribute a specific amount every month, building a contingency fund for whatever healthcare expenses come your way. If you end up not needing long-term care, the money is still yours and can be used for your living costs, unexpected expenses, or an inheritance for your heirs.
Regardless of where you are in life and the financial obstacles you face, the important thing is you start planning for this aspect of retirement. We know that thinking about the need for long-term care can be deeply unsettling and confusing. That’s why our team at Zuk Financial Group is here to help by offering comprehensive financial planning services. If you have questions about your long-term care options and want to make sure you have the coverage you need, get in touch with us today at (909) 626-1947 or pzedick@zukfinancial.com to schedule a complimentary consultation and start working toward a brighter future.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. You may also visit your state’s insurance department for information. State insurance laws and insurance underwriting rules may affect available coverage and its costs. No strategy assures success or protects against loss. Investing involves risk including loss of principle.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty and surrender charges may apply.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contact, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.
Pamela Zedick is a Certified Financial Planner™ (CFP®) at Zuk Financial Group with over 15 years of personal financial planning experience, a Bachelor of Arts in Accounting, and an MBA from the University of Pittsburgh. Pam specializes in serving professional women as well as educators, helping them create a plan through customized strategies and services. She is committed to acting as an investment fiduciary for her clients, putting their interests first in all that she does. Outside of work, Pamela enjoys swimming, exercising at the gym, and cheering for the Pittsburgh Steelers. She also loves the arts, especially going to the theater and listening to live music. Pamela recently became a first-time dog owner, and Speck, her miniature dachshund, has become the hit of her neighborhood. To learn more about Pamela, connect with her on LinkedIn. CA Insurance Lic# 0D82095.
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(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html
(3) https://www.genworth.com/aging-and-you/finances/cost-of-care.html
(4) https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
(6) https://www.americanactionforum.org/research/the-ballooning-costs-of-long-term-care/
(7) https://longtermcareinsurancepartner.com/blog/using-annuities-to-pay-for-long-term-care