The good news: We’re living longer, thanks to healthier lifestyles and continuous improvements in medical care. Now the bad news: This increased longevity comes with its own challenges. The longer you live, the greater the chance that you’ll need extended medical care—whether it is rehabilitation after a broken hip, or to manage the effects of Alzheimer’s disease or any of the other ailments that may wait down the road.
No one really likes to think about needing long-term health care services. But the reality is that each year, an estimated 11 million U.S. adults need some type of long-term care.1 This number is expected to increase substantially as the percentage of the U.S. population aged 65 and older increases as baby boomers get older. “As you age, your potential for needing long-term care increases significantly,” notes Tim Gannon, vice president at Fidelity Investments Life Insurance Company.
In previous generations, the caretaker role typically fell to family members. For instance, an aging father would move in with his grown child’s family, who would provide care—from help with daily activities to rides to doctors’ appointments. These days, however, many of us are reluctant to saddle our children or other loved ones with responsibility for care. “Baby boomers in particular don’t want to be a burden on their families,” says Gannon. “Family dynamics have changed.”
That leaves the aging population in need of help from professionals—including home health aides, nursing homes, and other providers. And that help can be costly: A year of nursing home care carries a median cost of $87,600 for a private room, according to Genworth’s 2014 Cost of Care survey.2 So you face a crucial decision as you get older: Should you rely on your retirement nest egg and other savings to pay the bill if you need long-term medical care, or should you consider the up-front cost of long-term-care insurance?
“The question is, do you want to buy insurance and pay now to protect against something that may or may not happen in the future, or pass up insurance and take the chance that nothing will happen or that you will have sufficient assets to pay the full cost later?” explains Gannon.
Also, long-term-care insurance costs can vary substantially from year to year. For example, coverage for a 55-year-old single woman increased an average of 12% in 2014, to $1,225 from the year before, while coverage for a single man declined 14% in 2014.3
To view the cost of long-term care by state, see the interactive below.
The cost of long-term care
Before deciding whether to purchase a long-term-care insurance policy, consider the costs involved if you don’t have insurance. If you’re age 65 or older, Medicare generally pays for routine medical issues such as regular doctors’ visits and appointments with specialists. In-patient procedures at hospitals are typically covered, and some short-term home health care services are provided to Medicare recipients.
But Medicare does not cover most long-term-care needs, such as an extended stay in a nursing home facility. Medicare will pay for some expenses, noncustodial only, for up to 100 days. And Medicaid will typically help only once you have depleted your savings. As a result, you may need to cover the costs of home-based care, nursing home care, or other long-term-care needs out of your own pocket. “I think a lot of people fall into the trap of thinking that Medicare is going to cover these types of medical expenses,” says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. “Unfortunately, that’s not the case.”
So how much will you actually have to pay out of pocket for these kinds of services? The answer depends largely on where you live—or where you choose to live in retirement. While annual nursing home costs a median $87,600 for a private room, they vary from state to state. In Louisiana, you’ll pay a median of $59,000; in Connecticut, the median cost is more than $155,000. Similarly, the national median hourly rate for a home health aide is $20—or $45,000 a year—but it is a median $37,000 a year in Alabama and $56,000 a year in North Dakota.4 “These are substantial costs for a family to have to absorb without insurance,” notes Ewanich.
The true financial cost comes at the expense of your long-term savings. Relying on your retirement nest egg to pay for your medical expenses as you get older can jeopardize your financial future, whether that means reducing the income you can draw from your savings in retirement or undermining the financial legacy you can leave your heirs. For your spouse, depleted savings could mean a major change in lifestyle. “If you take the chance and end up needing long-term care, you’re potentially changing whatever financial plan you put into place for retirement—for both you and your spouse,” says Gannon.
Understand the insurance option
Long-term-care insurance can offer the peace of mind that medical events won’t derail your financial plan. But the policies can be quite complicated, so you need to consider whether you want to buy coverage, and take special care to buy a policy that’s appropriate for your needs. Here are some things to look for when evaluating a policy, whether you’re considering individual coverage or shared benefit coverage for couples.
When to buy your policy: The longer you wait, the more expensive the coverage will be—and the greater the potential for a medical event to occur while you’re uninsured. Even if you don’t have a significant medical event, certain health issues may stop insurers from approving your policy. “People typically buy long-term-care insurance in their late 50s,” says Ewanich. “It’s cheaper than it is later in life, and you’re more likely to qualify.”
The amount of coverage: Most long-term-care policies cover the same types of costs, from nursing home stays to home health aides. Choosing a plan often starts with choosing how much coverage you want. Ewanich notes that buying long-term-care insurance is like purchasing a pool of money. That pool of money is laid out as either daily or monthly coverage: for example, a plan might offer $200 a day in coverage or $6,000 a month.
Gannon and Ewanich recommend basing your coverage in part on where you live. The map above can help you gauge long-term-care expenses in your state. “Some states are significantly more expensive than others,” says Gannon. “It’s important to understand what the costs are where you live or where you plan to retire, so you can purchase the right amount of coverage.”
The duration of your coverage: Next, consider your coverage period, or how long your long-term-care insurance would last following a medical event. Ewanich notes that some plans offer unlimited coverage, but he doesn’t think it is worth the additional cost for most people. According to the Department of Health and Human Services, the average use of long-term-care services is three years.5
When your coverage kicks in: Unlike medical insurance, which typically covers such things as doctor visits, surgery, hospital stays, and emergency room visits when someone falls ill, long-term-care insurance is for individuals who are unable to perform certain normal daily functions, called “activities of daily living,” or ADLs. ADLs include eating, bathing, dressing, toileting, continence, walking, and transferring (moving from a bed or chair to a standing position).
For benefits to be triggered, a person must be unable to execute one or more ADLs. For most long-term-care policies to start benefits, for example, a person must be unable to dress and feed himself or herself. Each policy has different criteria to determine the onset of benefits to be paid out, but ADLs are typically the measure.
You also can choose when your long-term-care coverage kicks in after you experience a medical issue. Your elimination period, or waiting period, starts from when you become disabled or satisfy the ADL requirements. You can pay for policies with no waiting period, but Medicare will cover care for certain health-related needs for short periods—for instance, after a stroke or heart attack. Therefore, it may make sense to have some waiting period, and, in general, the longer the waiting period is, the cheaper the insurance premium. “For most people, the happy medium for waiting periods seems to be about 90 days,” says Ewanich.
Inflation protection: While you need to make choices about several pieces of the long-term- care puzzle, there’s one option that is especially important to consider: inflation protection. If you purchase long-term-care insurance in your late 50s, you may need the benefits 20 years down the road. Without increased coverage through an inflation-protection rider, your coverage two decades from now is likely to pay for only a fraction of the care it would fund today. You could buy significantly more coverage to fund future costs, but, in general, inflation protection is a better fit.
Policies offer inflation protection in two forms: simple and compound inflation. Simple inflation takes the original benefit and increases it by a set dollar amount each year, while compound inflation protection uses the last year’s benefit as the base for calculation. A $300 daily benefit would grow to $450 over 10 years at 5% simple inflation, while the same benefit would grow to $488.67 using compound inflation protection. Although more expensive, compound inflation protection may be more likely to keep up with rising health care costs, particularly over longer periods of time. So if you are buying insurance in your 50s, you may want to consider it.
The provider: You may not need to make a claim on your insurance for decades after you buy it, and that makes choosing the right company extremely important. You may want to consider a company with a long track record in the industry and strong financial health, to ensure that it will be able to pay benefits down the road. Additionally, you may want to consider the company’s rate history: If you are paying over time, you don’t want to have rates increase suddenly.
Choose the right plan for you
Knowing the basics of what to look for in a long-term-care policy can help you as you compare plans. But it’s important to realize that no single long-term-care plan is right for everybody: An appropriate plan for one person may provide much more coverage than you need or want. As a result, it’s important to factor in your personal circumstances as you shop for a long-term-care policy. “Not all the features, benefits, and riders of these policies are for everyone,” says Gannon. “The right plan depends on each individual’s situation. If you buy a policy without carefully considering your situation, you may end up paying for more—or less—coverage than you ultimately require.”
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