Preparing for the unexpected: Planning for long-term care solutions

Paul Simmons, CFA, CFP®
Senior Analyst, Client Needs Research
Once you've determined how long-term care expenses may impact your financial goals, it's important to understand what potential solutions may be available to you. There are three main approaches to address the risk of significant long-term care (LTC) expenses:
So how do you know what option may be right for you? First, it's important to understand whether you can afford the premiums – today and in the future – of insurance. Typical long-term care insurance premiums can be $3,000 or more per year depending on the type of policy, level of benefits, age, and gender. If you can't afford any insurance, your best option may be to self-insure.
If insurance is an option, here are some factors to help guide your decision:
Factor to consider | Self-fund — Insure | Why |
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Estimated LTC need | Lower ← → Higher | Protecting against lengthy events, such as dementia, may require insurance to meet your need. |
Tolerance for uncertainty | More ← → Less | Insurance can provide a known resource for covering long-term expenses, and reduce the impact on your other financial goals. |
Asset flexibility | More ← → Less | The ability to use assets, such as selling a vacation home, may allow you to self-fund more LTC expenses. |
Expense flexibility | More ← → Less | A higher level of discretionary spending in retirement, such as travel, may afford you the ability to self-fund more LTC expenses. |
You'll want to consider whether to insure one partner or both and how much coverage for each. It may be helpful to have your financial advisor run multiple scenarios with different coverage options to understand which options make the most financial sense.
There are some nice benefits but also some substantial risks if you choose (or need) to accept the risk of covering long-term care expenses yourself. You’ll be able to decide when and how to start receiving care, and you won't have to worry about meeting the qualifications necessary for an insurance policy to pay benefits.
But you're also bearing the entire cost yourself. If you have significant care needs without enough income or savings to cover the costs, this can impact the quality of care you receive (as you may be limited by what you can afford), as well as have negative financial implications for you and your family.
To ensure you understand the impacts, work with your financial advisor to run scenarios to see how a long-term care event would affect your retirement and legacy, if that's important to you. For example:
Transferring the risk to an insurance company can mitigate some of the planning uncertainty. When considering an insurance policy, be sure that you understand what criteria will need to be met for the policy to pay benefits, including what counts as chronic illness.
Additionally, keep in mind that most policies have a waiting period (known as the elimination period) before benefits begin. You'll want to make sure you have enough savings to cover your expenses during this period (typically 90 days).
When considering insurance, there are three primary types:
Traditional long-term care insurance provides the highest amount of coverage per dollar of premium. This is because other insurance solutions typically serve multiple purposes. But premiums that can increase combined with the risk of paying for insurance you may not use has resulted in many preferring other insurance options.
Hybrid, or linked-benefit, insurance allows you to access the death benefit early while also providing for long-term care needs over and above the value of the death benefit.
Life insurance with chronic illness riders also allows you to access the death benefit early, but only pays an amount up to the death benefit. Not all chronic illness riders are the same and some policies require that your chronic illness be deemed permanent (or that you are not expected to recover) before you can use it for a long-term care need.
Traditional long-term care insurance | Hybrid/linked benefit insurance | Life insurance with chronic illness riders | |
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What is it | Insurance policy that pays for LTC expenses. | Life insurance that uses the death benefit plus an additional amount to pay for LTC expenses. | Life insurance that uses only the death benefit to pay for LTC expenses. |
What are the benefits |
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What are the trade-offs |
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Another option is to share the risk. For example, you could plan to self-insure the expected costs of one year’s worth of long-term care expenses and buy insurance for additional expenses. Many diagnoses have a more gradual impact over time, and self-insuring home health care costs may be manageable. Purchasing insurance could then help supplement for diagnoses that require care that lasts longer than you want to cover yourself.
Did you know that qualified long-term care expenses can be paid for tax free from your Health Savings Account (HSA)? In addition, qualified long-term care insurance premiums (which can include some hybrid and life insurance policies with an accelerated death benefit rider) can also be paid for tax free from your HSA, up to certain limits. If you have a large HSA balance, you may consider using HSAs for long-term care expenses and premiums since HSAs have less favorable estate tax treatment.
It's important to note that you may be eligible for some government benefits which may provide some supplemental coverage for long-term care expenses. Primarily, those include:
Overall, understanding the impact a potential long-term care event could have on you, your family and financial goals is an essential part of retirement planning. Identifying the potential risk, educating yourself on the solutions, and working with your financial advisor can give you the confidence to implement a plan that meets your needs.
Important information:
1 https://www.soa.org/resources/experience-studies/2013/idi-valuation-table/
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P. and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C. California Insurance License OC24309