Planning for long-term care is a challenge. 3 things to consider.

  • By Elizabeth O'Brien,
  • Barron's
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Long-term care is one of the biggest challenges in retirement planning.

The costs can be enormous, the solutions limited, and the discussions hard to stomach. But an estimated 70% of older adults will eventually need some long-term care, and since Medicare doesn’t cover this, it’s important to consider how you might pay for it.

“Not planning for long-term care expenses can be more detrimental to your portfolio than any market downturn,” says Alanna Morey, Ameriprise private wealth advisor with Siena Wealth Advisory Group in Naples, Fla.

Here are some considerations for preretirees.

Take care of yourself

By some estimates, up to 80% of the factors that influence aging are under your control. Eating healthily, avoiding excessive drinking, getting adequate sleep and exercise, and maintaining strong social connections can go a long way toward lengthening your health span—that is, the amount of time you spend in good health. That, in turn, can shorten the duration of long-term care, or possibly even prevent the need for it altogether.

“The longer we can stay home, the less expensive it is,” says Larry Nisenson, chief growth officer of Assured Allies, a provider of evidence-based “successful aging” products.

Assured Allies provides wellness programs for long-term care insurance carriers. Certain policyholders can earn extra money toward their future care by taking preventive measures like getting regular dental cleanings and getting their hearing tested, with the overall goal of helping people age in place for as long as they can.

Decide whether to buy insurance

The main decision for preretirees is whether to self-insure against long-term care risk or to buy an insurance policy. The vast majority choose the first, either by default or because insurance policies can be pricey and rather limited.

Yet many advisors recommend their clients at least consider long-term care coverage. They generally consider the best candidates to be those with $500,000 to around $2 million of investible assets. Anything less, and you will likely deplete your resources and go on Medicaid for long-term care coverage (rules vary by state, but you generally have to impoverish yourself to qualify). Anything more, and you can probably afford to self-insure.

There are two main types of long-term care coverage: traditional long-term care insurance and life insurance policies with a long-term care rider. Both usually limit the duration and dollar amount of coverage. Many older policies offered unlimited coverage, and although the average care need is around three years, some policyholders need care for much longer periods, and insurers have racked up big losses.

Premiums vary greatly

According to an illustration last year by the American Association for Long-Term Care Insurance, premiums for a policy bought when both members of a couple were age 55 for a benefit pool of $165,000 each with a 3% inflation rider ranged from $5,018 to $14,695 a year.

Traditional insurance is “use it or lose it,” whereas hybrid policies offer a death benefit if care isn’t needed. The death benefit generally amounts to a return of premiums paid—roughly $100,000 in total, typically—plus a slight return, while the care amount is capped at a higher level. Both types of policies require medical underwriting to qualify.

If you choose to self-insure, many advisors suggest making assumptions about the care that will be needed, calculating how much that might cost in your area, and setting that amount of money aside in a high-yield savings account or other safe vehicle.

Recent research suggests that many couples worry about what happens after one of them dies, and they try to preserve their nest egg to pay for long-term care for the surviving spouse. “They’re very well insured when they’re together because of informal care,” says Elena Capatina, senior lecturer at Australian National University and one of the researchers.

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