When asked about retirement goals and concerns, clients often bring up long term care needs, and rightly so! According to several studies, 70% of people over the age of 65 need some form of long term care during their lives.1 Those who reach age 65 have about a 40% probability of needing nursing facility care.2 Considering these statistics, most people will either need long term care for themselves or will assist emotionally, physically or financially in the long term care for loved ones at some point in their lives.
Long term care can be expensive! Of course, the cost varies depending on where you live, but as an example, the current cost for home health care in Alabama averages $100-150/day. For Alabamians needing nursing home care, the average cost range is from $163-$205/day for a private room.3 Supposing a need of 3 years, total costs could easily top $200,000. This could pose a huge financial risk to a retirement plan. We strongly urge you to consider your own personal risk and map out a plan for how to pay for care if it is needed. One way to do this is through long term care insurance.
When considering long term care insurance, there are five primary factors that make up a policy.
1. Services Covered: Some policies cover both home health care and facility care, while others will only cover one of the two. Obviously, purchasing a policy that covers both settings will require higher premiums, but also allows for more flexibility.
2. Coverage Level: Coverage needs will vary greatly depending on your financial situation, but as a rule of thumb, many long term care professionals suggest coverage of around 60% of the estimated need for individuals and 80% for couples. Therefore, if you are an individual who estimates the cost of care at $200/day, you may choose to purchase a policy with $120/day benefit. You would be responsible for making up the difference from your savings. Usually this is appropriate because basic living costs decrease once you are in a long term care situation.
3. Benefit Period: The average stay in a nursing facility is around 2.5 years, but most people receive some form of home health care before they enter a facility.4 Many providers now offer a “share care” policy option that allows for couples to share a pool of benefit years such as 6 or 10 years. There is no one-size- fits-all! It is important to consider family medical history, goals and costs when determining the appropriate benefit period.
4. Elimination Period: This refers to the number of days of care that you are responsible for paying out of pocket before the policy benefits will begin. The most commonly used elimination period is 90 days.
5. Cost of Living Adjustment (COLA): A cost of living adjustment will help your policy keep up with rising inflation. There are several types of adjustments available. The appropriate adjustment, if any, depends largely on your age and the cost of the rider.
There are several other riders or policy options that may be appropriate for your situation, but the five listed above cover the basic considerations. The cost of a policy depends largely on your decisions about these factors.
Long term care insurance is not for everyone. In some cases, there are enough assets to self-insure. In others, current net worth and cash flow needs just do not make the cost of long term care insurance attractive. Regardless, the need for long term care can be devastating to a retirement plan. It is important to understand how the risk affects your goals and develop a plan to address it.
4Centers for Disease Control/National Center for Health Services, National Nursing Home Survey, 2004
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