The low-down on long-term care insurance
Q: My wife and I are both in our early 60s and we are starting to think about retirement. When we did our financial plan, our planner tried to sell us long-term care insurance. He showed us some policy options and we were a little taken back by the amount of premium we would have to pay even though the coverage didn’t look very good. Is long-term care insurance a good idea or is our planner just trying to earn a commission? Are there other options we should consider?
A: Long-term care is a difficult part of financial planning. I can’t comment on the motivations behind your financial planner’s recommendation, but I wouldn’t let that get in your way. According to the U.S. Department of Health and Human Services there is a 70 percent chance that someone turning 65 years old today will need long-term care at some point in their future. Women, on average, will need 3.7 years of care; men will need 2.2 years.
If you end up needing long-term care, it will cost a lot of money. Genworth, a leading provider of long-term care solutions, has conducted a national survey of long-term care providers each year for the past 17 years. In 2020 they interviewed 14,326 nursing homes, assisted living facilities, adult day health facilities and home care providers. According to the survey, the national median cost of care in a skilled nursing facility with a private room was $8,821 per month, while a semi-private room cost $7,756. However, there are wide regional disparities. A private room in the Monterey/Santa Cruz area will cost you on average $12,547 per month. A semi-private room will cost $9,201. On the other hand, if you are willing to go to someplace like Mobile, Alabama, you will pay about half that amount. You can see the full details of the Genworth study, including regional data for different levels of care, at https://www.genworth.com/aging-and-you/finances/cost-of-care.html.
In my financial planning practice, I come across a lot of misconceptions regarding paying for long-term care. Here are some of the most common:
- “Medicare will pay for it.” Reality: Medicare will not, except for a very limited type of coverage for a very short period of time.
- “I’m covered by Medicaid.” Reality: Medicaid pays only if you are destitute, and then the level of care is not something most of us would aspire to.
- “I’ll pay for it from savings.” Reality: Long-term care will chew through your savings quickly. Most people do not have enough savings to cover basic retirement, much less the added costs of long-term care.
- “My family will care for me.” Reality: There are some things you don’t want family members doing for you, and they don’t want to do them either.
Given these realities, you should carefully look at long-term care insurance. But brace yourself–it is expensive. A stand-alone policy for a person in their 50s will probably cost between $2,000 and $3,500 per year depending on the specific terms of the policy. And you will probably pay those premiums for decades before you actually need to file a claim. While younger people do make claims, the American Association for Long-Term Care Insurance reports that 70 percent of new claims filed in 2018 were for policy-holders over the age of 80.
Hybrid policies have become a popular way to get long-term care coverage. Hybrid policies combine long-term care insurance and life insurance. Typically, hybrid policy premiums are significantly higher than stand-alone long-term care policies. The additional cost is used to build up the policy’s death benefit. Generally, I recommend keeping your insurance coverages separate. It makes it easier to understand what you are doing with insurance and why. However, in some circumstances a hybrid policy makes a lot of sense.
For example, suppose you have built up a significant amount of cash value in a permanent life insurance policy. As you move into your later years, you may feel you no longer need the same amount of life insurance coverage. By doing a 1035 tax-free exchange from your permanent life insurance policy into a hybrid policy, you can use the cash value in your life policy on a tax-free basis to buy long-term care insurance. Since long-term care benefits are tax-free, you avoid ever paying taxes on the cash value.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to: firstname.lastname@example.org