How to Afford Long-Term Care

Your options range from conventional coverage to tapping your life insurance benefits.

A person sitting at a desk, holding a pen, with a calculator, piggy bank and a stack of coins
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You’ve heard it before: Long-term-care costs can shatter your retirement nest egg. The average cost of a private room in a nursing home is more than $100,000 per year, and the average amount of time people need some kind of long-term care is about three years.

But there are crucial nuances in real life. A frequently cited statistic says that if you’re 65 years old, there’s a 70% chance you’ll need long-term-care services during your lifetime—but that includes unpaid care by family. Plus, you may need care for only a few weeks or months.

A study by the U.S. Department of Health and Human Services projected that 48% of people turning 65 between 2015 and 2019 won’t need any paid care. But more than one-fourth will need more than $100,000 of care, and 15% will require care that costs more than $250,000. The bill could top $500,000 over five years for someone with dementia in a memory-care unit in a nursing home. “Insurance would never have been invented if everybody were average,” says Claude Thau, an actuary and long-term-care consultant in Overland Park, Kan.

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That’s why it’s important to assess the risks, says Jean Young of the Vanguard Center for Investor Research and co-author of a study analyzing health care costs in retirement. The study concludes, “Even if the probability of incurring expensive care is relatively low, the number is at a magnitude that is hard to ignore.”

Financial planners tend to start talking about long-term-care costs when their clients’ financial focus shifts from raising kids to envisioning retirement. Many people in their fifties and sixties have seen how much long-term care has cost their parents and want to protect some of their savings if they end up needing care themselves.

Personalize the risk

Because the cost of care can vary so much from person to person, it’s essential to look at your own risks, the types of care you want, costs in your area, and your savings and income when figuring out how to incorporate care costs into your financial plan.

Thau recently created a tool that uses long-term-care claims data to help planners get a better estimate of the financial risks of long-term care for their clients. Included are questions about gender, age, marital status, geography and the client’s network of potential caregivers.

“It’s a very individual math problem to solve for each client,” says Brooke Salvini, a certified financial planner in San Luis Obispo, Calif., and a member of the American Institute of CPAs’ personal financial planning executive committee. Salvini begins her consultations with clients by explaining the average cost of different types of care using Genworth’s Cost of Care study. She then asks questions to help them estimate their own costs, such as whether they plan to stay in the area or move to be near children (care costs can vary significantly by city) and whether they’d like to receive care in their home or move to a retirement community or assisted-living facility. She recommends going on a shopping trip to find out how much the places they’re interested in cost now. The specifics can change by the time you need care, but knowing the costs can give you more-realistic numbers to factor into your retirement plans.

Salvini uses four years as a starting point, then discusses risk factors that could increase the length of care, such as a family history of dementia. Then she looks at her clients’ savings, home equity and retirement income to determine how much they can afford to pay at the age they’re likely to need care (usually about 80). She factors in a drop in regular expenses—for example, they won’t have housing expenses if they move to an assisted-living facility. “We usually aren’t fully insuring because that can be so expensive,” she says. Most people pay for long-term care by tapping several sources, including their savings and home equity, she says.

After they figure how much of a gap they’d like to fill with insurance, they look at several coverage options, including traditional long-term-care policies and hybrid life insurance policies that also provide long-term-care benefits. Some also consider how much extra they’d need to start saving now to cover the potential costs themselves.

Karen Petersen, 60, of San Luis Obispo, started working with Salvini when she and her husband separated about 10 years ago. They had discussed long-term-care expenses for a few years, but Petersen finally took action five years ago after a friend was diagnosed with ALS in her forties. Petersen and Salvini calculated the costs in her area, where she’d like to stay, and how much she could cover from her savings and retirement income. After Salvini showed her three long-term-care insurance options, Petersen chose a Genworth policy that covers $200 per day for a four-year benefit period and increases by 5% per year. She pays $3,327 per year for the policy.

Petersen’s mother lived in assisted living for several years and spent one year in a nursing home before she died at age 88. Petersen doesn’t want her children, who are 26 and 29 and live hundreds of miles away, to worry about how she’ll pay for care. “I want my kids to know that I’m taking care of myself,” she says.

Some people are reluctant to pay premiums for insurance they may not use and would rather self-insure. Ken Weingarten, a certified financial planner in Lawrenceville, N.J., says people with $2.5 million to $3 million in savings may have enough money to self-insure if they have a high level of retirement income from pensions and Social Security and have average long-term-care expenses. But if they don’t have pension income, he says, “they may be on the cusp.”

“What if they get dementia and they need memory care that costs $150,000 per year for eight to 10 years? That can start digging into a portfolio.”

Weingarten and his wife, Trina, both now 51, bought long-term-care insurance when they were in their late thirties—much younger than usual—because of his parents’ experience. Weingarten’s mother was diagnosed with multiple sclerosis when he was a teenager and needed increasingly more expensive care for several years before she died. She had some long-term-care coverage through his father’s company. But after his mother’s care costs exhausted the policy, his parents spent down almost all of their savings and eventually turned to Medicaid, which paid for his mother’s nursing home but left his father at age 50 with just the couple’s house, car and limited retirement savings.

Stuart Chen-Hayes, 56, and his husband, Lance, 55, both had a parent with dementia or Alzheimer’s. When they started working with Weingarten four years ago, they determined they were on target for their retirement-planning goals but were underinsured for liability insurance, life insurance and long-term care.

They figured they could cover some of the long-term-care expenses with savings and current income but wanted insurance to help. They pay about $1,100 per year each for policies with shared benefits, which lets either of them tap into the other’s pool of money if they need more coverage. The policies provide them both with monthly benefits of $4,000 for up to four years, creating a pool of benefits worth almost $200,000 each, which increases by 3% per year for inflation.

Ways to cover the cost of care

There are several ways to pay for long-term care. John Ryan, an insurance specialist in Greenwood Village, Colo., who works with fee-only financial planners, usually shows how much it would cost to provide the same monthly benefit in several different ways. Each option has pros and cons.

Traditional long-term-care policies. A traditional LTC policy is usually the most efficient way to cover costs if you end up needing care. You choose the daily or monthly benefit and the benefit period, and usually an inflation adjustment of 3% per year. Choosing a smaller daily benefit but a longer benefit period tends to cost less for the same total pool of money, says Tom Hebrank of Advanced Planning Solutions in Marietta, Ga. The earlier you buy the coverage, the lower your annual premiums will be, but you’ll have to pay premiums for a longer period of time.

One way to hedge your bets is to get a policy with shared benefits with a spouse or partner. For example, if you each bought a shared policy with three years of benefits, you’d have a total pool of six years that either spouse could use. This tends to increase premiums by 15% to 30% per year but may make you more comfortable choosing a shorter benefit period, says Brian Gordon of MAGA Ltd., a Chicago-based agency specializing in long-term care that works with financial planners.

Most policies with shared benefits let both spouses share the total pool of money, but some provide an extra pool of benefits. Mike and Kristi Henritze of Windsor, Colo., bought New York Life policies last year, when he was 49 and she was 47, that cost $1,646 per year for Mike and $2,015 per year for Kristi. They get a 25% couples’ discount for buying the coverage together, and both have $200 in daily benefits for three years, which equals a benefit pool of about $200,000 each. They can also increase their benefits (and premiums) based on changes in the Consumer Price Index every year. They paid 25% more to add an extra $200,000 pool of benefits that either can use.

It’s becoming more difficult to qualify for long-term care if you have any health issues. Some companies only insure 50% to 60% of applicants, compared with 90% in the 1990s, says Gordon. A surprising number are rejected because of their height/weight ratio, and some companies are limiting coverage if a parent had Alzheimer’s. Standards vary by insurer; Gordon asks a lot of medical questions to help pinpoint the company with the best deal before his clients apply.

Most policies pay out if you need help with two of the six activities of daily living (such as bathing and dressing) or have cognitive impairment, and they cover care at home, in an assisted-living facility or in a nursing home. Some require you to use a licensed caregiver from an agency.

Premiums can increase after you buy the policy, which has happened to many people over the past 20 years. Ryan recommends being prepared for premium increases of 20% every five years, although prices tend to be more stable on newer policies.

Hybrid life insurance/long-term care. More insurers are offering life insurance that provides extra coverage for long-term care. You usually pay a lump sum or premiums for 10 years, and you can 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. Long-term-care payouts are subtracted from the death benefit.

For example, with Lincoln Financial’s MoneyGuard, a 55-year-old woman paying $10,000 a year for 10 years would qualify for a $4,370 monthly benefit for six years, with benefits compounded by 3% annually. If she died without needing long-term care, her heirs would receive $104,820. Hybrid policies tend to be a good deal for single women, who generally pay 50% more than single men for traditional long-term-care policies. If you already have permanent life insurance, you can make a tax-free exchange, called a 1035 exchange, into a hybrid life insurance policy that provides long-term-care benefits.

Life insurance with chronic care rider. These policies let you access a portion of your death benefit early if you meet the standard long-term-care triggers. Some companies charge 5% to 15% extra for this feature; others don’t charge extra but reduce your death benefit by more than dollar-for-dollar if you withdraw money for care.

You can usually withdraw up to 2% of the death benefit each month, says David Eisenberg of Quantum Insurance Services in Los Angeles. The policies can provide some long-term-care coverage for people who are getting life insurance anyway. But the amount of coverage you receive may be limited, and your heirs won’t receive money you use for care.

Deferred-income annuities. These annuities don’t provide coverage specifically for long-term care, but they can provide income for the rest of your life starting in, say, your eighties, when you’re likely to need care. A 60-year-old man who invests $130,000 in a New York Life deferred-income annuity will receive $37,327 per year starting at age 80, says Jerry Golden of Golden Retirement in New York. You’ll get payouts even if you don’t need care, but they stop when you die. Your payouts will be lower if you choose an option that would allow your heirs to receive a lump sum based on your original investment, minus any payouts made to you. You can invest up to $130,000 of your IRA (but no more than 25% of your balance) in a version of a deferred-income annuity, called a qualified longevity annuity contract (QLAC). The money isn’t included in your required minimum distribution calculation.

What to do if you’re hit with a rate hike

Most people who bought long-term-care insurance policies more than five years ago have had at least one round of rate increases. When insurers first offered long-term-care policies, they underestimated the number of people who would have expensive claims, and they expected more people to drop their policies before they would have to pay out. Some insurers have increased rates on older policies by up to 90%.

Some rate increases that were approved by states last year are now affecting policies up for renewal. If you get a rate increase notice, you usually have a few choices. You could pay the extra premiums and keep the policy as is, or you could keep premiums the same and make changes to the coverage, such as reducing the inflation protection from 5% to about 3%, or reducing the benefit period from five years or more to about three years.

Weingarten, the certified financial planner in Lawrenceville, N.J., has faced two rate increases since he bought long-term-care insurance 15 years ago. When he got the first increase, he calculated how much his daily benefit had grown at a 5% compounded rate. He found that his coverage was more than care costs in his area, so he reduced future adjustments to 3.5% and kept premiums the same. At the next rate increase, he chose to pay the extra premiums and keep coverage as is.

Even after the rate increases, the cost of an older policy is generally much less than switching to a new policy, because rates have increased and you’d pay more because you’re older.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.