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Long-term care: Options and considerations

Key takeaways

  • The need for long-term care as we age can be financially, physically, and emotionally taxing.
  • Coverage options can include traditional long-term care policies, Medicaid, and hybrid policies.
  • If you’re considering a policy, think carefully about when to buy and about the features that make sense for your situation.

No one really likes to think about needing long-term health care services. However, the reality is that in America, someone turning 65 today has almost a 70% chance of needing some type of long-term care in their remaining years to assist with performing everyday tasks like eating or bathing.1 As many experienced during the COVID-19 pandemic, caregiving can take a financial and emotional toll on everyone in a family.

Are you prepared? According to the Department of Health and Human Services, the average use of long-term care services is 3 years.1

Long-term care expenses are a key risk to your retirement plan, and you need to plan for them. If long-term care is needed, it will affect you and your caregivers financially, physically, and emotionally. Having a plan to address these concerns is critical to easing the burden on you, your family, and your friends. Indeed, 57% of family caregivers have children under the age of 18.2

Your options

While it used to be that families cared for their aging relatives, today's elderly increasingly relies on professional care from home health aides and nursing homes. Often, long-term care starts with services such as home visits, then, depending on your health and independence, may transition to additional services that require full-time nursing care. These services will increase in cost if your required care increases.

You face a crucial decision as you get older: Should you rely on your retirement nest egg and other savings to effectively “self-fund” your costs by paying the bills out-of-pocket for long-term care service, or should you consider the up-front cost of long-term care insurance?

"The question is, do you buy insurance and pay now to help protect against something that may or may not happen, or do you pass on insurance, take the chance that nothing will happen, and then potentially have to pay the full cost later?” states Fidelity Investments Life Insurance President, Jerry Patterson. "One big factor to consider is how your financial picture may change as you grow older. The financial impact of a long-term care event may be much easier to absorb in your 50s or 60s, but it may be a very different situation in your 80s or 90s. Moreover, it's important to consider how self-funding versus obtaining insurance protection might impact your family members or caregivers later in life.” Long-term care is expensive, but having a plan for your care might make a difference in your quality of life—and your family's—as you age. (Read Viewpoints:  How long term care planning can help your loved ones). The key is weighing your personal needs against the costs and potential benefits of your options.

The good news: Hybrid products offered by insurance and financial companies may increase your options. Below, we discuss 4 options for paying for long-term care expenses, and how to weigh the pros and cons for your situation.

Annual national median costs3 (2023)

Homemaker services/ Home health aide $68,640 / $75,504
Adult day health care $24,700
Assisted living facility $64,200
Semi-private room in a nursing home/ Private room in a nursing home $104,025 / $116,800

The cost of care

To decide whether you need long-term care insurance and how much to buy, you need a sense of how much your care could cost. You can refer to the Genworth Cost of Care Survey 2023 to help estimate the potential long-term care costs in your state.3

Options to pay for long-term care

Essentially, there are 4 different ways to pay for long-term care: government assistance; traditional long-term care insurance; "hybrid" insurance, which offers life insurance or annuity benefits with long-term care coverage; and personal savings. Your options depend largely on your personal and financial circumstances and what you expect for your standard of care—both now and in retirement.

Government programs: Veterans and people with low income who can't afford to cover long-term care expenses might be eligible for long-term care assistance from the federal government, through Medicaid and the Veterans Health Administration, or state-run assistance programs.

You can't rely on Medicare to cover these costs, even if you're age 65 or older. Medicare doesn't provide benefits for long-term care and has only limited benefits for short-term care.4

Medicaid covers long-term care costs, but to be eligible, you need to qualify based on an income and asset test; Medicaid is generally designed for low-income individuals or families. Benefits and eligibility vary from state to state, and the choices for where and how you receive care could be limited.

Traditional long-term care insurance policies: You can choose the amount of coverage, how long it lasts, and how long you must wait before receiving benefits. Typically, you pay an annual premium for life, although your premium payment period could be shorter.

However, many insurance companies no longer offer traditional policies, and those that do may raise annual premiums after purchase.

Hybrid policies: One type of hybrid insurance offers life insurance and long-term care. “A single policy that provides benefits for two different scenarios can be very efficient. You have long-term care coverage available for you, and your beneficiaries receive a life insurance death benefit if you pass away before needing it,” says Patterson.

If you had a long-term care need, you would be able to draw down or accelerate the death benefit amount to pay for your care, subject to a monthly maximum amount. However, even if you used up the entire death benefit, the insurance company would still provide additional long-term care coverage.

Another type of hybrid is a long-term care annuity, which provides long-term care insurance at a multiple of the initial investment amount. The investment grows tax-free at a fixed rate of return, and, if used for long-term care expenses, gains will be received income tax-free. If you qualify for long-term care benefits, the long-term care coverage would draw down both the account value and the long-term care pool. Once your account value has been exhausted, the insurer would provide the remaining long-term care pool benefits, which is effectively the insurance component of the policy.

However, today's interest-rate environment has made it challenging for insurers to provide annuities with long-term care coverage, so it's important to note these products have yet to gain any significant traction in the market. As a result, they may not be available through your insurance company.

Personal savings: Using your personal savings to pay for long-term care costs can provide you with greater flexibility. However, before using your savings, ask yourself if your retirement plan is built to withstand these potential expenses. Also consider whether you have enough time to continue to save for this option given you won’t know when you might need to begin long-term care services—or for how long you may need them. Even if you believe your plan is sound, keep in mind that long-term care coverage can also help protect your other assets and allow you to pass your wealth on to your loved ones.

If you do use your qualified retirement accounts, such as your 401(k) or IRA, there may be tax ramifications for withdrawals.

Understanding your options

If you've decided you want long-term care insurance, you should think about when to buy it, how much coverage you want, and the types of features that make sense for your situation. How does someone figure out whether long-term care insurance is right for them?

When to buy

The older you are, the greater the chance you'll have a medical event that requires long-term care, or that you'll develop a health issue that will keep insurers from approving your policy application. People typically buy long-term care insurance when they’re in their 50s, or they are reviewing their retirement plan with their financial advisor. "At that point in your life, you're old enough to think seriously about long-term care, and there are advantages to making the decision at this time rather than putting it off until later. You're likely to pay less for the same amount of coverage than if you wait until you're older, and you're less likely to have medical issues that disqualify you for coverage," says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

In addition to the risk of your health deteriorating as you age, the financial cost of waiting to purchase a policy should be considered as it will typically become more expensive to purchase the same amount of long-term care coverage each year you wait.

When do benefits begin?

Typically, you become eligible for your long-term care benefits when you can no longer perform at least two "ADLs," or Activities of Daily Living (e.g., eating, bathing, dressing) without help. Then, most policies have a waiting period ("elimination" or "deductible" period), during which you pay for your care separately from your policy until your waiting period is completed and you can start long-term care benefits.

How much coverage?

Most long-term care policies cover the same types of costs, from nursing home stays to home health aides. You have to decide how much coverage you want, both in terms of the dollar amount of your benefits and how many years you want those benefits to last. As Patterson points out, buying long-term care insurance is like purchasing a pool of money that you can use for daily coverage (e.g., $200 per day) or monthly coverage (e.g., $6,000 a month).

Importantly, don't buy more coverage than you can afford. Instead, consider reducing the amount of coverage to balance your financial situation with your long-term care needs. Also, recognize that there are different ways to pay for your policy. While some are single-payment-premium policies that you pay in one lump sum, other policies can be paid for through periodic premium payments. Keep in mind that some policies may have the right to increase premiums after purchase; you should confirm that your premium payment amount is guaranteed.

Sustaining your coverage

If you're going to spend the money on long-term care insurance, make sure your benefits will be sufficient—and available to support you. Since long-term costs will likely continue their upward climb, you might consider adding inflation protection.

Also, choose an insurance company with a strong track record and solid financial health. You want to make sure the company has the longevity to be around for the long-term, so it can pay your benefits when you need them.

Making it personal

Your long-term care insurance should fit your personal situation. An individual may need a different level of coverage than a married couple because a single person must consider the long-term care needs of only one person. For couples, consider the effect on your spouse's financial situation if you have an extended long-term care situation. It’s also important to factor in your family medical history and know the risks you face. Certain hereditary diseases in your family—like Alzheimer's or diabetes—could make it more likely that you’ll have long-term care needs in the future.

A thoughtful long-term care coverage decision is all about balance—weighing what you can afford, the kind of care you expect, and the risks you might face. It is not just a financial decision, but using insurance may help relieve the emotional and physical burden for caregivers such as family members and friends. Made carefully, it's a decision that may help avoid financial catastrophe and provide you with peace of mind for your retirement.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

1. "How much care will you need?", US Department of Health and Human Services: Long-Term Care, February 2020, 2. "The Caregiving Crisis", Genworth, 2021, 3. Genworth Cost of Care Survey, conducted by CareScout®, December 2023, 4. For more information regarding benefits provided by Medicare or Medicaid (Medi-CAL in California) visit Medicaid guidelines vary by state. Contact your local Medicaid office for details.

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