Researchers estimate that more than half of today’s 65-yaer-olds will require long-term care at some point, at an average total cost of $138,000. But one in seven Americans turning 65 today will face more than five years of disability, with potentially dire financial consequences. How do people pay for this care? Medicare covers only short stays in a nursing facility. Medicaid can fill the gap, but only after you’ve depleted most of your assets. And if you want to live in an assisted facility, you’re pretty much on your own.
What options are available today to pay for long-term care costs? How do they compare?
Traditional Long-Term Care Insurance
The median cost of a semiprivate nursing home room nationwide is $82,125 per year, according to Genworth’s 2016 Cost of Care Survey. Assisted living runs $43,539 with home health aides charging a median of $20 per hour. Traditional long-term care insurance gives you the peace of mind that no matter where you need care, you’ll have the money to cover at least a portion of the bill. A lengthy stay at a nursing home is less likely to drain your savings or wipe out your estate.
For a few thousand dollars a year (annual premiums average $2,727, according to an industry research firm), you’ll lock in a benefit (an average of $161 per day for a nursing home) for a set number of years (three is most common). You can include an inflation rider that increases your daily benefit over time, typically by 3 percent a year. The policies go into effect once you can no longer perform two of six “activities of daily living” or suffer from severe cognitive impairment. Benefits start after a 30- to 90-day waiting period.
The Downside
What your premium gets you is shrinking as buyers opt for lower daily benefits, shorter coverage periods, and reduced inflation protections.
Expect hefty premium hikes later. Some experts advise to plan for a 50 percent increase.
You must continue paying premiums until you need the care, possibly for decades, or you’ll forfeit the benefits.
Short-Term Care Insurance
Short-term policies cover up to 360 days at home or in a facility. Qualifying is easier, and the premiums are much lower. Some policies allow you to carry forward the unused amount and extend the coverage period longer than a year. Because the potential benefit period is shorter and more predictable, these policies have a better history of rate stability.
The Downside
Short-term policies may not cover all care options and may have stricter requirements, so you’ll want to be clear on what’s important to you. For example, not all pay for assisted living or home care.
If the point of insurance is to protect against catastrophe, short-term policies fall short. Though you might be able to pay for a year of care out of income and savings, multiyear stays can wreak havoc on finances.
Hybrid Life and Long-Term Care Policies
This increasingly popular option is a policy that combines life insurance with long-term care coverage. You can tap the death benefit to pay for long-term care. If you don’t need that care, your heirs get the full payout. Rates are considered “noncancelable,” which means premiums are fixed for life and often paid all at one up front.
The Downside
A single premium means you’ll have to come up with tens of thousands of dollars at once. In 2016, the average single premium was $89,000, according to LIMRA, an insurance marketing research group.
You may buy life insurance you don’t need.
Unlike with traditional long-term care insurance, the premiums are not tax deductible.
You could forego thousands of dollars in potential earnings on your investment if interest rates rise, because the policies don’t guarantee you’ll earn market rates.
Which option is right for you? It depends. Your trusted advisors can help you decide.
Questions? Takacs McGinnis Elder Care Law may be able to help. Just give us a call at 615.824.2571.