Long-Term Care: Understanding Your Options and Planning for the Future
Sep 18, 2024
Many people underestimate their chances of needing long-term care as they age. In fact, 70% of people turning 65 will require some form of long-term care during their lifetime, and nearly half (48%) will need paid services. To put this in perspective, the average driver has only a 2% chance of being in a car accident each year, yet almost everyone has car insurance. Similarly, the odds of a house fire are just 0.03% annually, but most homeowners carry insurance for this unlikely event.
Given the strong possibility of needing long-term care, it’s important to plan ahead for how you’ll cover these costs. While long-term care insurance is one option, it’s not the only solution. There are multiple ways to manage long-term care expenses; understanding these options will help you make the best decision for your circumstances. You typically have three main choices for paying for long-term care:
- Medicaid
- Long-Term Care Insurance
- Self-Insuring
Let’s take a closer look at each of these options, their benefits, and potential downsides to help you decide what fits your plan.
1) Medicaid: A Great Resource, But Limited
Medicaid is a government-funded program that can help cover long-term care costs, but it comes with significant limitations. To qualify, you must meet strict financial requirements, which often involve spending down your assets to very low levels. Medicaid may only cover care in certain facilities, and your options for types of care or locations can be more restricted compared to private pay.
While Medicaid is an important resource for those with limited financial means, relying on it could reduce your control over your care. It’s essential to consider whether Medicaid is right for you, especially if preserving your assets or maintaining a higher standard of care is a priority.
If you decide to explore this route, consulting an elder law attorney is crucial to avoid costly mistakes. You can find an attorney through resources like the National Academy of Elder Law Attorneys.
2) Long-Term Care Insurance: Evolving and Expensive
Long-term care (LTC) insurance remains an option to cover care costs, but it has changed significantly in recent years. Premiums have risen steeply due to insurers underestimating claims and the number of policyholders maintaining their coverage. As a result, fewer providers offer standalone LTC policies, and those that do often have reduced benefits and stricter requirements.
Hybrid policies, which combine life insurance or annuities with long-term care coverage, have become a popular alternative. These policies provide flexibility—offering a death benefit if you don’t end up needing long-term care. However, they face similar challenges of high costs and strict health requirements, and the premiums may be unaffordable for some.
Ultimately, while hybrid policies offer more options than traditional LTC insurance, they don’t fully resolve the key issues of affordability and accessibility. Weighing the costs and potential benefits carefully is essential when considering LTC insurance.
3) Self-Insuring: Planning for the Costs on Your Own
Self-insuring for long-term care means covering the costs entirely from your own savings and assets, without relying on insurance or government programs like Medicaid. While this may not be suitable for everyone, we recommend this approach for many of our clients at Carroll Advisory Group.
To do this, we incorporate long-term care expenses directly into your retirement income plan, typically projecting costs for two years of care. Some clients choose to plan for three or even four years of coverage, depending on their preferences and risk tolerance.
This expense is added toward the later years of your retirement plan, which will result in a noticeable increase in your income needs during that period. By including these costs in our financial projections, including Monte Carlo simulations, we ensure that your plan is fully stress-tested for this significant expense.
How to Calculate Future Long-Term Care Costs
Most modern retirement planning software can estimate long-term care expenses for you. However, many programs use national averages, which may not reflect the actual costs in your location. For example, in 2023, the cost of a private room in a nursing home was $6,692 per month in Texas, but in Connecticut, it was $16,577. Clearly, the state where you receive care has a major impact on how much you’ll need to set aside.
This is where tools like the Genworth Cost of Care Survey become invaluable. Genworth’s annual report provides detailed data on current and projected costs of long-term care services across the U.S., including in-home care, adult day care, assisted living, and nursing homes, with breakdowns by state and region.
To plan effectively, it’s important to consider a progression through different levels of care. Most people don’t go straight from not needing any care to requiring a nursing home. The typical path often starts with some in-home care, then transitions to assisted living, and eventually to more intensive care in a nursing home.
Start Planning for Long-Term Care Today
With 70% of individuals aged 65 and older likely to need some form of long-term care, the financial impact can be substantial. Whether you choose Medicaid, long-term care insurance, or self-insuring, having a well-thought-out strategy is critical for securing your financial future.
To get started, utilize tools like the Genworth Cost of Care Survey to understand the local costs in your area. Incorporate these expenses into your retirement plan as early as possible, so you’re prepared for whatever may come. By planning ahead, you can ensure your long-term care needs are met without jeopardizing your financial security or the well-being of your loved ones.
Steps to Get Started:
- Research local long-term care costs using the Genworth Cost of Care Survey or other tools.
- Evaluate your assets and savings to determine if self-insuring is a feasible option for you.
- Consider Medicaid eligibility and the potential limitations if you rely on this program.
- Explore long-term care insurance or hybrid policies to assess whether they make financial sense for your situation.
- Meet with a financial planner to incorporate long-term care expenses into your overall retirement strategy.
By taking these steps, you can feel confident that you’re prepared for the future—whatever it may hold.
