In working through the retirement and financial planning process with clients, we typically get a number of questions about long-term care insurance.
Long-term care (LTC) refers to a broad category encompassing several areas: custodial care, skilled nursing care, and other healthcare services provided over an extended period of time. The healthcare services take place in various settings such as nursing homes, assisted living residences, or at home.
The need for long-term care usually emerges with some sort of “trigger” event. Common drivers include the progression of Alzheimer’s disease, cancer, and stroke, but there are many reasons that one may need some form of long-term care.
The big question is, “Does long-term care insurance make sense for me?” While complex, we’ve put together these key questions to help you determine your path forward and whether it makes sense for you to buy long-term care insurance.
As a starting point for evaluating your long-term care insurance needs, look to assess cost. The cost of health care differs based on the type of care, but your age and current health status play a part in the calculation.
As you can see from the chart above, a private room in a nursing home is much more expensive on an annual basis than general home health aide services, usually conducted in one’s private residence. Assessing the cost gives you a better perspective on what you will need to expect to pay, based on your health status.
Great question. Take a look at this retirement planning timeline to see our recommendations based on your age and stage of life. You will see that we recommend <Age 60, or the Initial Planning part of the process, to assess your insurance needs, and this includes long-term care.
After age 60, prices spike pretty dramatically for purchasing long-term care insurance. If possible, we recommend making a decision before this point. Over age 60? It may still make sense for you; however, you should just be aware that it will be more expensive.
Certain pre-existing conditions are a bar to qualification for coverage. Medical underwriting varies by insurer.
While people think immediately of a nursing home, long-term care is much broader and could also mean home health care, adult day care, and assisted living. As part of your evaluation of long-term care insurance options and plans, make sure you think through what type of care you prefer and whether or not it will be addressed in your plan.
If you want the option to purchase additional coverage in the future, this is a factor you should consider when evaluating your insurance plan.
Similar to question #5, depending on your insurance plan, you may be able to get reimbursement for home modifications, medical equipment, and other needs that support your long-term care. Ensure you address this when evaluating your plan.
Contrary to what most people assume, long-term care is not an all or nothing decision. There are many different options to explore. Use these questions to help figure out which option is right for you.
If so, consider the following: There are six general categories of activities of daily living (ADLs); assistance with two or more will trigger the activation of benefits under most LTC policies. The six general categories include: bathing or showering, dressing, getting in and out of bed or a chair, walking, using the toilet, and eating.
Cognitive impairments can also trigger LTC benefits, even if assistance with ADLs is not required.
This is an important one to think through. Oftentimes, family members provide the bulk of long-term care and assistance. Consider whether your policy pays for family caregivers and/or covers caregiver training.
Once you understand the various costs and reviewed your coverage options, it’s time to determine the best way to fund your long-term care.
There are four different ways to fund your care:
Which is best for you? Here are some questions to consider.
If so, you should compare self-funding any future costs to paying up-front premiums for long-term care insurance. As part of this comparison, weigh the impact on your cash flow, asset base, and wealth transfer planning.
No! This is a common misconception. Medicare does not cover long-term care. For more information about medicare, check out our Medicare 101 guide here.
If so, you can pay a portion of your long-term care insurance premiums from your HSA, based on your age at year-end.
If so, explore discounts for married couples.
Indemnity benefits paid from a qualified policy are income tax-free up to $390 per diem, or your actual long-term care expenses, whichever is greater. Payments that exceed the dollar cap, and for which no actual long-term care costs are incurred, are included in taxable income. Benefits paid from a non-qualified policy may be subject to income tax.
If so, consider the insurer’s financial strength, reputation, and customer service ratings.
If so, review the history and frequency of premium rate adjustments.
If so, compare fixed daily payments (i.e., cash indemnity) to reimbursement payments, subject to caps.
Depending on your tax planning, you can potentially offset your tax liabilities with your long-term care. This is a crucial part of your decision-making.
As with every financial decision, there’s a domino effect with regards to taxes. It’s no different for long-term care: pulling funds from various retirement accounts or utilizing long-term care insurance can impact your tax situation.
Here are some important tax consideration questions to think about.
If so, consider how relying on your retirement accounts and taxable portfolio might expose you to ordinary income tax, capital gains tax, and possible surcharges and/or penalties.
If so, premiums paid for a qualified LTC insurance policy can be included with other unreimbursed medical expenses ($450 up to age 40, $850 up to age 50, $1,690 up to age 60, $4,510 up to age 70, $5,640 over age 70). If you itemize, you can deduct unreimbursed medical expenses (including LTC premiums) that exceed 7.5% of AGI.
If so, consider the following:
All of these long-term care questions and considerations should be built into an overall, holistic financial plan. Long-term care can be a major expense. If you have an unexpected health event that you haven’t planned for, it can throw you completely off your trajectory.
If you answered no to either of these last two questions, or felt yourself getting more and more stressed out as you read through this guide, you should consider partnering with a trusted financial advisor.
Long-term care needs and the decision to buy insurance is just one part of your financial and retirement planning. An advisor can build these considerations into an overall, holistic plan that puts you at ease, even if your healthcare needs arise suddenly.
Take a look at our sample financial plan to get a better sense of what a holistic, all-encompassing financial plan looks like. Want to have a custom-financial plan, tailored to your family, created for you? Drop us a note in the “Contact Us” section, and we’ll reach out to you to set up a discovery call.