Long-term care planning is one of the most important tasks on your to-do list when preparing for retirement. Around 70% of adults (1) who survive until age 65 develop “severe” long-term care needs before they die, and 48% receive at least some paid care over their lifetime according to the Office of the Assistant Secretary for Planning and Evaluation.
Unfortunately, the costs of care can blow through your nest egg, with the annual median cost of an assisted living facility totaling $70,800 per year and the annual median cost of a semi-private room in a nursing home totaling $111,325, according to the Genworth Cost of Care Survey (2).
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So how exactly should you prepare for long-term care? Let’s pretend that Susan is 60 years old, married, and getting ready to retire soon. She’s considering long-term care coverage but isn’t sure whether it’s a good idea or how to find the best option if it is.
Susan’s husband is older and already retired, the couple has around $600,000 in 401(k) assets, and they have enough money to live reasonably comfortably but not to cover a $111,325 annual bill. So, what should Susan do?
Is buying a long-term care policy before retirement a good idea?
Susan is smart to think about how she’ll cover long-term care costs, because without a plan, she’d probably have to pay out of pocket.
“Many people assume Medicare will cover long-term care expenses, but in reality, Medicare generally only covers short-term skilled nursing or rehabilitation after hospitalization,” Angie Welsh, founder and president of My Annuity Agents (3) in Henderson, NV, told Moneywise.
So does that mean Susan should buy insurance? “Whether buying coverage makes sense usually depends on whether you have sufficient assets to absorb the cost if you do need long-term care,” Welsh said.
With just $600,000 saved, Susan couldn’t cover the costs out of retirement savings without withdrawing too much money too fast and putting her spouse at risk. While her husband could keep a shared home and certain assets, they’d have to spend down most of their wealth on care costs before Medicaid would kick in to pay for a nursing home if Susan needed one.
If Susan wants insurance to avoid this, she should act sooner rather than later. “If you want long-term care insurance, it’s smart to buy it earlier in life so that the costs are absorbed over time,” says Welsh. “Many people wait until they are already retired to consider a long-term care policy. By then, the costs are usually prohibitive.”
Premiums for a 60-year-old single female average $1,900 for a policy providing $165,000 in coverage with no inflation protection, or $2,600 for a combined yearly premium for a couple, according to the National Council on Aging (4). If Susan can afford this, purchasing it could provide peace of mind.
While spending $2,600 on insurance premiums is certainly preferable to covering a nursing home out of pocket, the premiums are still a big expense. And Welsh said many are reluctant to pay such high premiums when there’s a chance they may never need long-term care at all.
Susan can also explore other alternatives if she decides she doesn’t want, or can’t afford, to pay for a long-term care policy. As the AARP (5) explains, options could include:
Long-term care annuities that provide consistent monthly income and contain special provisions to pay for long-term care expenses.
Hybrid life insurance/long-term care policies that allow you to use a death benefit to pay for long-term care if you need it, but pay out the death benefit if you don’t.
Medicaid planning, which involves working with an estate planning lawyer to make a plan to protect assets and still qualify for Medicaid.
Susan can compare costs and eligibility for each of these different options to see which makes the most sense.
How to find the best long-term care policy
If Susan does decide to buy long-term care coverage, she should make sure to research her options carefully.
“Pay attention to the details,” advises Welsh. “Is there a benefit period? Is there a daily or monthly benefit amount? Can you receive care at home? Is the premium guaranteed, or will it skyrocket later in life? Understand what you are buying before signing on the dotted line.”
Ideally, Susan will find a policy that pays out enough to cover the actual costs of care, that guarantees premium costs, and that provides flexibility on when and how you can get care.
If Susan can find good coverage, she can buy it and retire knowing her hard-earned money won’t all be lost if she happens to need care. If she can’t find an affordable policy that meets her needs, exploring one of the other solutions could be her next move to ensure she’s prepared and ready for whatever comes her way.
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ASPE (1); Genworth (2); My Annuity Agents (3); National Council on Aging (4); AARP (5)
