Without a doubt, long-term care is a pricey proposition and if you need it, it will probably be your biggest retirement expense. In fact, the U.S. Department of Health and Human Services estimates that elder care services will cost the average person $138,000. And the chances of needing some form of long-term care are higher than many people realize.
Someone turning 65 today has an almost 70 percent chance of needing some type of long-term care. What’s more, about one in five will need care for more than five years, according to the HHS. Women are more likely to need this type of care due to their longevity.
Sadly, Medicare, the health care insurance program for those 65 and older, does not cover long-term care. It will cover long-term care in very limited circumstances, such as care in a rehab facility if you suffer an illness and injury with the expectation of improvement. But most people who need long-term care do not have an expectation of improvement. They need help with what are known as “activities of daily living,” defined as:
Purchasing a long-term care insurance policy is one way to cover the costs associated with this kind of care. Such policies will present you with a list of options, such as asking you to select a daily payout amount and the number of years you want this benefit paid. For example, you might choose a policy that reimburses you for $200 a day for up to three years.
Long-term care insurance, however, can be expensive. Here are two examples, based on a 55-year-old single male and a 65-year-old married couple, furnished by the American Association of Long-Term Care Insurance.
Because of the wide range of prices quoted, consumers should work with a long-term care specialist to help them identify the best insurer and policy for their needs and budget.
Single Male, Age 55: $164,000 benefit, no inflation growth
Company A: $ 835-per-year
Company B: $2,196-per-year
Couple – Both Age 65: $164,000 benefit, 3% inflation growth
Company C: $4,280-per-year (combined)
Company D: $8,493-per-year (combined)
The cost of coverage is likely to increase every year, unlike term life insurance premiums, which stay the same as long as you have your policy in place. However, the younger you are when you first buy the policy, the less it will cost. Your premiums will still go up each year, but the base from which they will increase will be lower.
Given this high cost, it’s no wonder many people are looking for alternatives. Here are 10 possibilities.
Unlike Medicare, Medicaid, the federal health insurance program for low-income individuals, does pay for long-term care, but only in certain circumstances. Medicaid will pick up the tab for nursing home care, not care in your own home.
However, you can only tap Medicaid after you’ve exhausted the majority of your assets. If you think you can simply dodge Medicaid asset limits by transferring your money to a family member, think again. The program has a five-year look-back period to prevent just this type of scheme. Any gifts or transfers you make within five years of the date you apply for Medicaid may be subject to a penalty.
To be sure, the primary purpose of life insurance is to protect the people you love from financial hardship after your death. However, some policies offer an accelerated death benefit, which allows policyholders who have a terminal diagnosis or chronic illness to get their death benefit while they’re still alive.
According to the trade group, the American Council on Life Insurance, insurance companies allow policyholders to tap between 25 and 95 percent of their death benefit through their accelerated death benefit programs. In some cases, you might be able to access the entire death benefit. To pursue this option, you must either buy a separate rider (at an additional cost) or pay a service fee. These fees—as well as the amount of the money you receive from this feature—will reduce your heirs’ death benefit.
Once your children are grown and out on their own, it might no longer make sense to hold on to the big, family spread where they grew up. After selling your current home and moving to a less expensive one, put your remaining sale proceeds into a savings or investment account that will grow over time and become a source of funds to tap in the event you need long-term care.
A smaller space will also reduce maintenance costs and produce insurance and tax savings, leaving you even more money to invest in your long-term care.
If your goal is to stay in your home, also called “aging in place,” then a reverse mortgage can help you do that. Unlike a traditional mortgage, a reverse mortgage lets you tap a portion of your home equity without having to pay it back until after you leave your home or do not comply with the loan terms. You are still responsible, however, for home maintenance and the payment of your property taxes and homeowner’s insurance. To qualify, you must be at least 62 years old, own and live in your home as your primary residence, and have sufficient home equity in it.
One strategy to consider: Open a reverse mortgage line of credit. This payment option allows you to tap the line only when you need it. The unused portion of your credit line continues to grow, giving you access to a potential larger source of funds down the line when you might really need it.
Health savings accounts
A health savings account or HSA allows you to make tax-deductible contributions to pay for health care expenses up to a limit of $3,500 for individuals and $7,000 for families. (Those 55 and older can sock away an additional $1,000 a year.) Any money you don’t use in a given year can remain invested and continue to grow tax-free, giving you a pool of funds to pay for your long-term care needs.
Beware: If you use the money for non-medical purposes, you will have to pay ordinary income tax on it and a 10 percent penalty if you are under 65. However, there is no tax owed for using the money for medical and healthcare purposes such as long-term care. Please consult your tax advisor about your particular situation.
“Medical tourism” has long been seen as an alternative for people trying to cope with high medical bills. Retiring overseas, in a locale where you can stretch your dollars, can also be a way to handle long-term care costs. You’ll need to plan this move carefully, comparing locations with respect to their affordability and access to quality healthcare. Initiate this strategy well in advance of any long-term care needs so you won’t face any surprises or disappointments after moving to your new location.
Continuing-care retirement community
While you are still in good health, consider a move to a continuing-care community, also called a life plan community. These communities offer a range of housing options with different levels of care. At first, you can live independently in an apartment or condo, with access to various meals and housekeeping plans. As your health changes, you can move into a facility with more care such as assisted living or a nursing home.
Continuing care facilities can be pricey, requiring an upfront entrance fee, plus a monthly fee, which could rise if your need for care increases. Entrance fees can run as little as $50,000 and up to $1 million. Meanwhile, monthly fees can range between $500 and $3,000, and even higher in some cases.
People with service-related disabilities can get long-term care services through the U.S. Department of Veterans Administration. Vietnam-era veterans, however, don’t have to have a service-related disability if they were exposed to Agent Orange, a hazardous defoliant from which they developed a health condition later in life.
In addition, there’s a pension benefit through the VA called Aid and Attendance that provides money to pay for care if you need assistance performing the tasks of daily living. What’s more, even if your income is above the limit to receive a VA pension, you can still qualify for the Aid and Attendance benefit if you have substantial, unreimbursed medical expenses. To qualify, you must have served in the military for at least 90 days, with at least one day of service during wartime.
Even better, family members who care for you can get compensated through the program.
There are two basic types of annuities: deferred and immediate. With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals. If you opt for an immediate annuity, you begin to receive payments soon after you make your initial investment.
Which kind of annuity you select may ultimately come down to your age and how you view both your short- and long-term health prospects.
If you are in poor health, you may qualify for a medically-underwritten annuity, which will give you a higher payout due to your reduced life expectancy.
Your own savings
The average need for long-term care is three years, according to Health and Human Services.
Were you to need such care for this period or any length of time, and hadn’t made plans to pay for it with an annuity, reverse mortgage proceeds, life insurance, or other financial instruments, you would simply have to dip into your own savings.
In effect, what you’re doing is self-insuring. If you never require long-term care, you will have saved a bunch of money from not having paid insurance premiums all those years—money you can pass on to your heirs. But if you do require care, especially over a lengthy period (one in five people require care for more than five years), then your roll of the dice could bankrupt you, depending on your assets.
With long-term care insurance being so pricey, it’s important to consider all your options carefully. No matter what you choose, start planning as soon as possible so you can give yourself and your family the most flexibility, and, of course, most care for as long as you need.