A Financial Planner Looks at Long-Term Care Costs

I bought my first home when I was 30 years old. It was at some point during the real estate closing process that I realized I was going to have to buy a refrigerator for my new digs. I was single at the time and up until that point I’d been spending money on things like trips, bikes and dinner out with friends.  Sure, buying a new refrigerator was a very important purchase, but it also felt expensive and surprisingly complex. Plus, I had about a million other things I would have rather been spending my time and money on. It was something I hadn’t ever considered in my twenties. You might say that buying a new refrigerator was a kind of marker, indicating a new stage in life for me.

Ok. Maybe that’s a bit dramatic. However, a few weeks ago, I wrote about several financial items I plan to tackle next year after I turn 50. Of all the items I listed, one stands out to me as the most important, but it also feels a bit like buying that refrigerator years ago. Putting a plan in place to handle long-term care costs is important, it can be complex and sometimes it can be expensive. Plus, there are a million other things I’d rather spend my time and money on. And, since your fifties are an ideal time to consider such a plan, perhaps it’s a rite of passage associated with this stage of life.

Long-term care costs are the expenses associated with needing assistance with activities of daily living such as bathing, dressing and eating. Such care might be needed over a short period of time or over many years and it could involve anything from a little help around the house to full time attention in a memory care unit at a nursing home.

Creating a game plan to tackle any potential long-term care costs probably isn’t on your top 10 list of fun things to do either, but it’s important.

It’s important because many of us will require at least some type of long-term care during our lifetimes. In fact, according to to LongTermCare.gov about 70% of us will require some care at some point. And Medicare only provides limited coverage.

It’s also important because that type of care can be expensive. For example, here in Raleigh, the cost of a fulltime home health aide, assisted living facility and private room in a nursing home are $4,576, $4,300, and $8,821 per month, respectively. Of course, not all of us will require those levels of care but you can see why it’s wise have a contingency plan in place to handle them should it become necessary. I got those NC numbers using Genworth’s Cost of Care calculator if you’re interested in researching costs in your area.

Planning for long-term care costs can be challenging. For starters, we don’t even know if we’ll need care. And even if we assume we might, we don’t know what type of care we may need, for how long we’ll need it or how much it will cost in the future. Plan for too little care and large expenses could end up derailing our important long term financial goals or leaving our spouse in a tight financial position. Plan for too much and we could end up paying too much in insurance premiums or putting unnecessary constraints on our financial resources.  Perhaps we could have retired earlier, traveled more or given more away during our lifetime when we could have seen the fruit of our generosity.

Ok. Now for some good news. Even though planning for long-term care costs can be challenging for some, that doesn’t mean that is has to be for you. Starting to plan early is one way to make the process simpler and even less expensive. Enlisting the help of a good financial planner is another step in the right direction. A knowledgeable planner should be able to help you explore the different alternatives for covering the potential costs of future long-term care needs. In fact, there are actually many different ways you can plan to cover such costs. For example, you could plan to …

Tap the equity in your home – That could mean planning to sell your house (or even using a reverse mortgage) so you can use the proceeds to cover the cost of care. I wouldn’t be surprised in reverse mortgages become more popular in the future, especially if the costs associated with them continue to fall and become more transparent.

Sell your vacation home – Maybe you own a home at the beach or in the mountains that you plan to keep as long as possible but would be willing to part with it should you, or your spouse, need significant care.

Self-fund – it’s certainly possible that some people will have the cash flow or assets to cover the cost of care and still accomplish their other important life goals.

Buy a traditional long-term-care insurance policy – If you have a reasonable amount of financial resources but not enough to self-fund, this may be an option worth exploring. You could even buy a policy that would cover a portion, but not all, of your potential costs. Traditional long-term-care policies have been through a rough patch over the last decade or so. Policy owners have experienced steep premium increases and/or benefit cuts and many insurers have dropped out of the market. Still, if you think insurance could be part of your plan, I’d suggest at least getting a quote or two for traditional coverage so you can compare the benefits to the next option.

Buy an asset-based or hybrid long-term care insurance policy – This usually involves purchasing a permanent life insurance policy that allows you to access the death benefit early (and tax free) should you need to pay for care. They often include a cash value component should you want to surrender the policy early. Asset-based and hybrid policies have become more popular in recent years in part because they may offer coverage for long term care needs with more reliable premiums and without the use-it-or-lose-it aspect of traditional policies.

Note: Whether you’re interested in a traditional policy or a hybrid policy, between the ages of 50 and 60 is the ideal time to shop for coverage. Hopefully you’re healthy enough that you can still qualify for coverage and the premiums for long-term care policies get more expensive when you get into your sixties. Also, if you already own a permanent policy or an annuity, a potential option is to swap your current policy for a hybrid life-long-term care policy using what’s known as a 1035 exchange.

There are certainly other options for covering potential long-term care costs but hopefully this list is a good starting point for conversation.  Whether you decide to go the insurance route or not, around age 50 is a good time to put a plan in place. At that point, you’ve still got a good bit of time to implement your plan and, if you end up deciding to buy long term care insurance, premiums are more reasonable at 50 than at 60 and it’s more likely that you’ll be in better health.

At Beacon, we can’t help you with the refrigerator buying process, but we’d be happy to assist you as you put a plan in place to cover long-term care costs. We’re here to help.

 

 

Geoff Hall, CFP®
[email protected]

My wife, Crystal, and I have been married for nine years and have two kids, Cooper (7) and Rhodes (5.) When I’m not spending time with them you might find me downtown serving at our church, pushing my limits during a mountain bike ride or having coffee with a friend in the Five Points area. I've been practicing wealth management for 25 years and I'm thankful for the privilege of shepherding my family of clients through the ups and down of the markets and of life for that matter.