As a pilot, you may be very familiar with the life insurance and long-term disability coverage provided to you by your airline. However, one of the more overlooked aspects of financial planning is the need for long-term care (LTC), especially in our later years as health declines and we’re unable to care for ourselves.
While your first thought may jump to LTC insurance, it’s important to emphasize that LTC planning goes far beyond the question of how to pay for medical services that you may need. Personally, I’ve seen challenging end-of-life scenarios negatively impact both the individual needing care and family members due to the high costs of in-home care, dissatisfaction with nursing-home care and an undue burden on children/family members to personally provide care. Further complicating the planning is that many times the decisions surrounding LTC are taken out of the individual’s hands due to diminished mental and physical capabilities. Because of that, it’s vital to contemplate your ideal LTC scenario and put plans in place today to make sure your wishes are carried out. In this article, we’ll focus on the costs and types of care, LTC insurance options and estate planning tools available.
First, what is long-term care? The term is quite broad, and the types of services included in “long-term care” are highly dependent upon the level of care you desire, need, and can afford. For example, you may prioritize remaining in your home until death. In that case, it is important to plan for the costs associated with having in-home care available and potentially modifying the home to accommodate your care needs. On the other hand, you may love the idea of moving to an assisted living facility with services available on-site.
Unfortunately, sometimes we don’t get to decide how our LTC plays out. For example, those who suffer from extensive health issues that can’t be managed at home and/or Alzheimer’s/dementia may require care at a memory facility since staying at home may be unsafe. We will all likely need some level of long-term care. Because of that, it’s important to think about your desired level of care (e.g., staying at home) and myriad “what-if” scenarios.
What is the likelihood you’ll need traditional LTC services? LTC is typically geared towards those who are retired/later in life. Statistics tell us that a 65-year-old has a 70% chance of requiring some form of LTC for the remainder of their life. Typically, the average length of care needed is three years, with women averaging 3.7 years versus men at 2.2 years. For those between the ages of 40 and 50, the number drops to 8% of people who will require LTC services[i]. Keep in mind these are all averages. Some people may never need LTC, while others may require care for much longer, even five years or more is not unheard of.
The costs associated with LTC can be steep, vary by location, and depend upon the level of care you are seeking or need. For example, in the Dallas, Texas area, the average monthly cost of in-home care is $5,720 per month while a private room in a nursing home or facility on average can cost $7,178 per month. To see the costs in your area, Genworth has an easy-to-use calculator: Genworth LTC Calculator. Unfortunately, these costs have been rising rapidly. From 2021-2023, the cost of an assisted living facility has risen over 18% while in-home care for homemaker services have risen a little over 22%[ii].
The next logical question when planning for LTC is how to pay for those services. The easiest option is to “self-insure” the costs. When considering this option, it’s important to look at the costs you might incur and if your income from Social Security, pensions, annuities, and your retirement savings will be sufficient to cover them. Fortunately, most financial planning software can run this type of analysis. Again, LTC may not be a discretionary spending category depending upon your ailments or care needed.
You’ve probably heard horror stories (or experienced this yourself) of children effectively becoming the in-home care provider or having to pay for nursing facilities out of their own pocket due to the reasons mentioned above. On the other hand, suppose you can afford to self-insure, but giving your children or other beneficiaries a portion of your estate once you pass and not having that value eaten into by expensive LTC costs may be of high importance. In that case, or if you’re concerned that the future costs of LTC may greatly exceed your predicted income and savings, there are insurance options available.
The long-term care insurance industry has been on a bit of a roller coaster ride due to a rapid increase in medical costs over the years. First offered in the 1970s and 1980s, this coverage has evolved over the years. At the turn of this century, insurers realized they had mispriced the cost of insurance and premiums increased rapidly, with many providers of LTC insurance exiting the market altogether. What was once a relatively inexpensive type of insurance became prohibitively expensive for insurers[iii]. Unfortunately for the insurers, longer life expectancies have increased the likelihood of needing LTC, thus making coverage more expensive.
With that said, LTC insurance is still available as both a straight policy (premiums pay for LTC only) and hybrid policies (life insurance combined with a LTC rider). Due to the high premium costs, many people prefer to seek a hybrid policy. The rationale being that if you don’t (fortunately) use the LTC provisions of a policy then the money you put into the coverage isn’t for naught. Of course, with any type of whole-life or indexed universal-life policy the terms can be quite complex and the polices can be difficult to surrender, so it’s important to discuss the pros and cons with a disinterested, (i.e., not someone who benefits from selling the product via commission) trusted advisor before securing the policy.
Additionally, when considering an insurance approach to funding LTC, there is a big difference between the care you want (e.g., homemaker to come to the house and cook/clean) versus when the policy will pay out. Let’s explore some of the more important aspects of LTC insurance to review when considering a policy:
Type of policy:
As mentioned earlier, you can secure a “straight” LTC policy or a hybrid policy linked to a permanent life insurance policy. The LTC-only policy will likely be less expensive; however, a common critique is that the premiums paid will be a “sunk cost” if the LTC benefit isn’t needed. Additionally, premium costs can increase year over year and will likely have to be paid to keep the policy in force. On the other hand, a hybrid policy can provide the features of a traditional life insurance policy with a LTC benefit rider. While these policies tend to be more expensive, the death benefit/cash value can be appealing.
Eligibility:
Typically, this is associated with an inability to perform a specified number of activities of daily living (ADL) defined as bathing, dressing, toileting, transferring, continence and/or feeding[iv]. In many policies, to qualify you must be unable to perform two of the six ADLs. As you can see, an ADL threshold is far different from, “I want someone to cook dinner when I’m older.” It’s important to pay close attention to make sure the policy will pay when you want it to pay.
Waiting Period:
A longer waiting period means that you’ll have to pay out of pocket for any care required before the insurance policy pays. As in most LTC, disability-type insurance policies, having a strong savings and emergency cash on hand is important, especially if you’re dependent on pension or annuity to support your lifestyle in retirement. A typical waiting period is 90 days.
How does the policy pay?
Certain policies will only reimburse directly for services. Other policies will simply pay the maximum monthly benefit amount if you meet the eligibility requirements. The latter may be more expensive but can be less administratively burdensome and potentially pay a higher monthly amount depending upon the cost of care.
Benefit amount:
Most LTC policies will pay both a monthly maximum amount and maximum total amount where payments cease once the LTC benefit is exhausted. For example, a policy that pays a maximum of $20,000 per month with a total benefit of $500,000. Assuming you use the full monthly amount, you would have a little over two years of coverage.
The is probably one of the most important features of an LTC policy. If you want the ocean-front view, you’ll probably need a higher coverage amount. Also keep in mind that costs for care will likely rise. If you’re securing your LTC policy at a younger age, you may want an inflation rider on the policy to make sure your benefit keeps pace with what coverage will cost ten plus years down the road. Of course, an enhanced benefit will probably mean higher premiums.
Premium amount:
All the features discussed above will impact the premium that you’ll pay. When considering the policy, you want versus the policy you can afford, this is where the rubber meets the road. Straight LTC will typically require premiums to always be paid (and may increase over time) to keep the policy in force. A hybrid policy, on the other hand, can be structured to pay premiums only to a certain age (e.g., 65).
Whether you decide to plan for your LTC costs via savings or an insurance policy, there are other estate planning matters to consider. Specifically, implementing (or reviewing periodically for those who already do have) a living will and advanced healthcare directive. A living will, as the name implies, dictates how you would like to be cared for in the case of incapacitation. For example, you can dictate under what circumstances you would allow CPR or mechanical ventilation. Additionally, you should create a durable power of attorney for healthcare to name an agent who you trust to execute your living will or make decisions in the case that you are in a situation not covered by the living will[v]. As with any estate planning documents, it’s always a good idea to consult with an attorney when having legal documents made.
As you consider other means to provide for a potential LTC need, it’s important to emphasize that most private insurance providers and Medicare do NOT cover LTC[vi]. This is a common misconception that leads many to falsely believe that they have coverage, when in fact, they don’t. That said, it’s always important to review your insurance since certain services may be provided. For example, while Tricare doesn’t cover assisted living, it does cover home health care if certain conditions are met.
Perhaps more important than determining how you will pay for long-term care is starting the process now of contemplating what your end-of-life care looks like from a values and preferences standpoint. Doing this allows you to prepare your friends and family to represent your needs and wishes and ensure your beneficiaries are cared for.
Fortunately, simple estate planning in the form of advanced directives can accomplish much of this planning. While we don’t know how our long-term journey and the costs associated with that care will play-out, by visualizing your ideal state and planning for a worst-case scenario, you’ll hopefully be on a path to financial security and contentment.
Hopefully, you found this article interesting and helpful. If you have any questions, contact us at 865-240-2292 or [email protected].
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Leading Edge Financial Planning LLC (“LEFP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where LEFP and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.leadingedgeplanning.com.
[i] https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
[ii] https://pro.genworth.com/riiproweb/productinfo/pdf/131168.pdf
[iii] https://ltcconsumer.com/resources/ltci-library/the-history-of-long-term-care-insurance/
[iv] https://www.care.com/c/activities-of-daily-living/
[v] https://www.nia.nih.gov/health/advance-care-planning/advance-care-planning-advance-directives-health-care
[vi] https://www.medicare.gov/coverage/long-term-care
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