Personal Finance 301: Long-Term Care

What Is Long-Term Care?
•    Long-term care is custodial assistance to help with “activities of daily living.”
•    It’s estimated that about half of Americans who turned age 65 in recent years will need to pay for long-term care at some point.
•    Long-term care costs usually aren’t covered by Medicare, but long-term-care insurance and other strategies can help protect your savings.

Even if you plan carefully for retirement, there’s one financial wild card: long-term care. No one knows for sure whether they’ll need custodial care (non-medical help with activities of daily living) later in life, and that can make it difficult to plan for those expenses. 

Medicare provides very limited coverage of long-term care, which means you will be largely responsible for paying these expenses out-of-pocket. What’s more, the cost of such care continues to rise. Over the past 15 years, long-term care expenses have increased by as much as 3.64% on average. So, you likely don’t want to ignore the potential for needing care when planning for retirement.

To help cover the costs, there are several approaches to consider. One way is to purchase a long-term care insurance policy or a hybrid life insurance/long-term care policy. Other options include tapping into “living benefits” on a life insurance policy, purchasing a deferred-income annuity, or setting aside extra savings.

How Long-Term Care Insurance Works
A long-term care policy generally pays out if you need help with two out of six activities of daily living (bathing, dressing, toileting, transferring, eating, or continence), or if you have severe cognitive impairment and need substantial supervision. Most policies will pay whether you receive care in a nursing home, in an assisted-living facility, or in your own home.

If you buy long-term-care insurance, you’ll need to make several choices concerning policy coverage and terms:

•    Daily or monthly benefit. You choose the maximum amount the policy will pay each day or month.

•    Inflation protection. You may not need long-term care until 20 or 30 years from now, so inflation protection increases your daily or monthly benefit to help keep up with rising costs. Compound inflation protection of 3% is the most common.

•    Elimination period. This is the waiting period before benefits begin (such as 60 or 90 days). The longer the elimination period, the lower the premiums—but you’ll have to pay more out of pocket first if you need care.

•    Benefit period. This is the length of the time the policy will pay out. The longer the benefit period, the higher the premiums. Many people choose a three-year benefit period, which covers the average length of care. But you may want a longer benefit period if, for example, you have a family history of dementia.

•    Spousal discounts and shared benefits. You may get a discount for buying coverage with a spouse. And you may be able to hedge your bets with a shared-benefit rider, which provides a pool of benefits either spouse can use. For example, if you both have a three-year benefit period with shared benefits, you have a total of six years of coverage between the two of you. If one spouse only uses two years, the other spouse still has coverage for four years.

What Affects the Cost of Long-Term Care Insurance?
The cost of a long-term care policy can vary greatly based on:

•    Your age at the time of purchase
•    The policy type
•    The coverage you choose

The older you are when you buy the policy, the higher the premiums. That’s why most people buy this coverage in their 50s or 60s. And you may have to pay more—or may not qualify for a policy—if you have medical conditions that would make you more likely to need care. 

Premiums can rise after you buy the policy, so consider a possible increase when budgeting for the amount. 

Also, a portion of the premiums for a standalone long-term-care insurance policy may be tax-deductible as a medical expense if you itemize. The amount is based on your age—in 2020, up to $430 of your premiums can be tax-deductible if you’re 40 or younger; $810 if you’re 41 to 50; $1,630 if you’re 51 to 60; $4,350 if you’re age 61 to 70; or $5,430 if you’re over 70. Or you can withdraw up to that amount tax-free from a health savings account for long-term care premiums. 

Other Ways to Cover the Cost of Care
Hybrid policies that combine life insurance and long-term care insurance are becoming more popular because they pay out whether or not you need care. You usually pay a lump sum or premiums for 10 years and receive a death benefit worth slightly more than your premiums if you don’t need care. If you do need care, you can receive about three times the death benefit in long-term-care coverage. The long-term-care payouts are subtracted from the death benefit. Premiums for some hybrid policies can’t increase.

Another way to cover care costs is with a life insurance policy that has a chronic care rider. These policies let you access a portion of your death benefit early (usually up to 2% per month) if you need help with activities of daily living or have cognitive impairment. Some companies charge 5% to 15% extra for this feature; others don’t, but they reduce your death benefit by more than dollar-for-dollar if you use money for care.

Or, consider a deferred-income annuity to help pay care bills. You typically invest in the annuity while you’re in your 50s or 60s and then it pays a lifetime income stream starting in your 70s or 80s, when you’re more likely to need care. 

You can also set aside extra money in savings to cover these potential costs. Some long-term care expenses may be tax-deductible—see IRS Publication 502 at www.irs.gov.

How Much Coverage Do I Need?
To gauge your coverage needs, start by researching the cost of home care, adult day health care, assisted-living facilities, and nursing homes in your area (or the area where you expect to live in retirement). You can search and compare median hourly, daily, monthly, and annual costs by city, state, or zip code at www.genworth.com. 

Next, determine the type of risk you’re trying to cover. Consider your health, hereditary conditions and longevity in your family, availability of family caregivers, and personal preferences. 

Lastly, realize that you don’t need to buy insurance to cover the entire estimated cost, which can be very expensive. Instead, calculate how much you could pay from retirement income and savings when you’re likely to need care (usually in your 80s). Then, consider buying enough insurance for partial coverage to fill the gap.

What If I Have a Medical Condition?
If you have a medical condition, some insurers might not sell you a long-term care or life insurance policy. It’s a good idea in this case to work with an independent agent who deals with multiple companies and knows from experience which ones are likely to provide coverage in your situation. For example, some insurers reject people who have had certain kinds of cancer, but others cover some people who have been cancer-free for a few years. 

Also, some employers offer long-term care insurance as an employee benefit, which may be available regardless of your health. You can continue the policy when you leave the job.

For more guidance about navigating long-term care decisions, visit www.longtermcare.gov.

This chart is called Chances of Needing Long-Term Care Among people who turned 65 from 2015-2019. 48% Won’t need any paid care. 25% Will need care costing more than $100,000. 15% Will need care costing more than $250,000.Source: Department of Health and Human Services.

Kimberly Lankford is a freelance financial writer in Lynchburg, Va. She was a contributing editor for Kiplinger’s Personal Finance Magazine and is the author of The Insurance Maze: How You Can Save Money on Insurance—and Still Get the Coverage You Need (Kaplan, 2006).

Discover how health savings accounts can be used to help pay out-of-pocket medical expenses.

This article is part of Synchrony Bank’s Personal Finance Series: Level 301. View all topics in the series here.