How will you pay for long-term care?

You’ve probably seen lots of financial planning articles that talk about increasing longevity and the need to put more money away for retirement so you don’t outlive your savings. What’s less talked about, though, is the financial ‘one-two punch’ that longevity packs. Because along with living longer comes a much greater likelihood that a costly health event will occur—an event that without proper planning could quickly eat up your financial resources.

Many people assume Medicare is free and that it will shield them from any major healthcare costs once they retire. That’s incorrect on both counts. While Medicare Part A is free to own, there are costs to using it. And the other parts of Medicare—Parts B, C, D and Medi-Gap—all carry premiums and co-pays. In fact, according to a recent Fidelity study, a 65-year-old couple retiring today will have $295,000 in out-of-pocket medical expenses during retirement.^{Disclosure 1} That amount doesn’t include the potentially staggering costs associated with long-term care. While Medicare may cover a small portion of short-term rehabilitation costs, the lion’s share of costs associated with long-term care (e.g., nursing homes, home health care, assisted-living facilities) are not covered.

Studies have consistently told us that seven out of every ten Americans over age 65 will need some form of long-term care during their lifetime. Typically, women will need 3.7 years of long-term care while men will need 2.2 years of services. Given an average annual cost for a semi-private nursing home room in excess of $90,000 (more than $150,000 in some states), and over $200,000 for around-the-clock home health care, it’s easy to see how quickly a health crisis can consume a lifetime’s worth of retirement savings.^{Disclosure 2}

What can you do to prepare?

When thinking about ways to fund future long-term care expenses, there are several approaches you’ll want to consider. On the one hand, you could plan to draw down your own assets to pay healthcare costs as they arise (self-insuring) and rely on family members for care. Or, you could purchase one of several different types of insurance policies with long-term care benefits.

• Traditional long-term care insurance generally provides comprehensive coverage, but it comes with annual premiums which aren’t guaranteed.  A rise in future premiums could force you to make a difficult choice between paying more or reducing coverage. And if you end up never needing the benefits, you don’t get your money back.
• Alternatively, there are a several other options—from life insurance policies that offer long-term care benefit riders, to fixed annuities that pay out a multiple of your premiums if needed to reimburse long-term care expenses. These hybrid solutions pay an income-tax-free death benefit to your beneficiaries if you don’t use all your benefits; and some even offer a money-back guarantee through a return of premium feature.

Don’t wait until it’s too late

Long-term care planning is very much like retirement planning—the sooner you begin, the more options and flexibility you have, and the greater your likelihood of a successful outcome. Your advisor can assist you in estimating just how much you may need to cover out-of-pocket healthcare costs in retirement (including the costs associated with long-term care), and reviewing the various options for putting money aside to best fund your healthcare needs based on your individual circumstances.