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:

• Accepting the risk by planning to self-pay for any LTC costs (self-insuring)
• Transferring the risk by purchasing an insurance policy 
• Sharing the risk by combining self-insuring with an insurance policy

Which LTC solution could make sense for you?

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:

LTC Spousal/partner planning

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.

Pros and cons of accepting the risk

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: 

• Can your retirement strategy cover two to three years (or more) of potential long-term care expenses without derailing your retirement goals?
  • When running these scenarios, you may find that some expenses, such as travel and other discretionary expenses could cover some of the potential long-term care costs. It's important to have a budget to be aware of what expenses could be repurposed for a potential long-term care need.
• How might these potential costs affect your spouse and family in the long term? Your financial advisor can show the financial implications and help you reflect on the emotional impacts as well.
• How might other financial goals be affected by your decision to self-insure?  If you have specific legacy goals that are unmet, self-insuring may significantly impact your plans. However, if you have legacy goals that are fully met, for instance with life insurance, you may have the flexibility to self-insure.

Pros and cons of transferring the risk 

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).

Types of insurance to consider

When considering insurance, there are three primary types:

• Traditional long-term care insurance 
• Hybrid, or linked-benefit, insurance 
• Life insurance with chronic illness riders 

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.

Pros and cons of sharing the risk

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.  

Another consideration: Health Savings Accounts

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.  

Government benefits for LTC costs

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: 

• Medicare – Covers skilled nursing care for a limited time after a qualifying inpatient hospital stay (must be admitted at least three days, which doesn't count the day of discharge). Because Medicare coverage is extremely limited, we don’t recommend solely relying on it for covering LTC costs.
• Veteran's Affair Benefits – Provides benefits to previously active members of the U.S. military.  Benefits from the VA are provided on a priority basis depending on how the diagnosis is connected to service and certain income levels.
• Federal Long-Term Care Insurance Program – Provides benefits to federal employees and certain relatives. The benefits are similar to what can be found in other individual long-term care insurance policies.
• Medicaid – A government program intended to help lower-income individuals and families. Eligibility for Medicaid typically restricts income and assets.  The choices you have in terms of the location and what type of care are generally limited.  

Next steps

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.