If you are 65 or older, there is a 70% chance of needing long-term care at some point in your lifetime. But this isn’t an article to try to SCARE you into buying long-term care insurance.  In fact, the majority of retirees plan to (at least in their minds) “self-insure” for long-term care costs.   But the goal here is to attempt to educate you on the risks of not having a plan and a few of the many ways to pay for long-term care costs in retirement (insurance!). 

So let’s dive into some numbers here to start.  The cost of care will depend on where you live and the needed services. The national average for the cost of in-home care is $54,912/year. The national average for a private room nursing home is $105,850/year. For those that need around-the-clock memory care, they will likely be in the private room nursing home. Those who might receive care from a family member might need some relief for a few hours a day at home. This creates complexity when it comes to planning for care. Will you be part of the 70% that might need some form of care? How long will you need it and how much will it cost? There is no crystal ball, but I am writing this article to answer this common question, “Should I buy Long-term Care Insurance?”

Important considerations

Personal experience:

If you are approaching retirement, it’s always important to think about your personal experience dealing with a long-term care event. Have you seen a loved one or close friend go through it? How did it impact you?  I find that those who have personal experiences are more inclined to plan for it themselves. Additionally, I find they see value in having some form of insurance because of the peace of mind it provides.  But for those of you who have not had a personal experience, I encourage you to educate yourself and try not to put your family in an unpleasant situation should you ever need care (not that I’m saying YOU would).  

Assets:

Someone’s financial assets are a big part of long-term care planning. Some might make the mistake of thinking, “I have enough to self-insure,” and by default never look at buying Long-term Care insurance. Here’s a question to consider.  Why do Oprah Winfrey, Warren Buffett, Suze Orman, and other extremely wealthy individuals own Long-term care insurance? It’s simple. Risk management and tax efficiency. Why would they want to liquidate high-quality assets like real estate, stocks, equity ownership etc. to pay for long-term care? Their estate would likely forgo significant returns on those assets and realize significant tax penalties. While everyone may not be Warren Buffett, you very well might have a net worth of $2mm-$10mm, and have assets on the balance sheet that have performed quite well.  Liquidating those assets at a high rate to pay for care might be extremely tax-disadvantaged, particularly if most or all of your assets are in tax-deferred vehicles (IRAs, 401ks, 403bs, Annuity).  If you are taking distributions rapidly from these accounts, you need to consider the tax impact on those withdrawals.   

Alternatively, what if you leveraged a Long-term Care policy where the benefits are paid on a tax-free basis so you could preserve your best investments?  Just saying!

Financial Goals:

From my experience, this is one of the top variables when deciding to self-insure or buy insurance. Let’s say you have a burning desire to leave a financial legacy.  You have worked hard to accumulate your wealth and want to do all you can to preserve it for your heirs. Assuming you are still in good health, you might be a good candidate for buying long-term care insurance. If you had a long-term care event, which might cost upwards of $300,000 (after taxes), this could jeopardize your ability to leave that financial legacy. If you are married and your spouse survives you, that creates even more of a burden on not only leaving the financial legacy but preserving your spouse’s financial independence by having fewer assets to live on. On the contrary, if there is no burning desire to leave a legacy or no concerns about leaving money to a spouse, self-insuring could be a viable option.

Do you own permanent life insurance?

This is important for two reasons.

First, permanent life insurance is a great tool to provide a tax-free death benefit to beneficiaries. This could be for a spouse, for children, or a trust. This is important because if you need long-term care services and use investment assets to pay for the care, the permanent death benefit could be used to replenish the assets used when you pass away. This works well because you can use investments for income during life, and use the life insurance for legacy.

Second, there could be sufficient cash value built up in the policy over the years of paying premiums. That cash value could be tapped into to help you pay for care later in life. Most policies, if structured properly, allow for loans on the cash value to be accessed on a tax-advantaged basis. When you pass away, the loans would simply be subtracted from the death benefit. This provides another bucket to use for “self-insuring.” Furthermore, if you are still in the sweet spot age of buying long-term care insurance (50-65), you could use the cash value (some, or all) to pay for long-term care insurance premiums on a tax-advantaged basis. This is done via what’s called a 1035 exchange. A 1035 exchange allows for transfers of funds from certain life insurance policies and annuities without paying taxes. Therefore, in addition to using cash value in life insurance, you might also be able to use cash built inside of annuities to pay long-term care premiums. Not all companies allow for this, and not all contracts are eligible, so be sure to consult with a professional to assist in this process so you can avoid any penalties.

Martial Status and Family Dynamics

70% of care being provided is done by “unpaid caregivers.”  This is because a spouse or family member is providing the care.  Don’t do this to your spouse.  Either buy some insurance or set aside income/assets to hire professional help.  And then communicate this to your spouse (and hopefully a trusted financial planner).   Even if you have children, you don’t want to put that burden on them!

Women outlive men, and therefore, they also need care longer on average (3.7 years for women vs 2.2 years for men).

I bring this up because we men typically put this burden on the wives.  We start to deteriorate first, our wives step in and take care of us.  Meanwhile, it could be months, or even years of being a caregiver.  This inevitably leads to burnout both physically and mentally.  Then, if the wife (Mom) ever needs care, the children are put in a situation where they need to come up with a plan.  Communication is everything!  If you have insurance, great.  Tell your kids about it (or trusted financial decision-makers).  

Health

Family history and current health status are important for obvious reasons. If you have a family history of dementia, you have a higher likelihood of needing care for a longer period of time. However, if you are not currently healthy, you may not be able to qualify for insurance in the first place, so self-insuring may be your only option. Longevity will also play a factor in how long your assets need to be intact, which brings inflation risk into the picture. Most people need care in their final years of life, so you might be planning for an event that might not occur for another 20 or even 30 years.  The cost of care has gone up at a higher pace than the consumer price index, so ensuring your long-term care assets or Long-term Care insurance is inflation-protected is critical. 

If you’re a blended family and have adult children from previous marriages, I wrote an article just for you on long-term care planning.  I encourage you to read here.