This is a question that the majority of people over the age of 60 consider, especially as they get close to retirement. Statistics show that long-term care should be a concern for everyone. According to the federal government’s long-term care resource from the Administration for Community Living, someone turning 65 today has almost a 70% chance of needing some type of long-term care services in their remaining years, and people who need care use it for about three years on average. But should you insure the risk?
To get to an answer we are going to look at the risk for single as well as married individuals and then discuss how to pay for long-term care. Federal employees also have one less option than they used to: the Federal Long Term Care Insurance Program is not accepting new applications right now (more on that below).
What is the long-term care risk in retirement?
The risk associated with long-term care is spending all of your retirement assets on long-term care expenses when you can no longer care for yourself. Keep in mind that Medicare generally does not pay for ongoing custodial care, so this is a cost most retirees would pay from their own resources or insurance.
Married couples
In my opinion, married couples are the most at risk. The reason is that the community spouse’s (the spouse not needing care, or the healthy spouse) lifestyle could be directly impacted. The risk in this situation is simple: the community spouse could be left with depleted assets due to the cost of care for the institutionalized spouse (the spouse needing care).
Care is expensive. In the 2024 Cost of Care Survey from Genworth and CareScout, the national median cost was $127,750 a year for a private nursing home room, $77,792 for a full-time home health aide and $70,800 for assisted living, and costs vary widely by location. It wouldn’t take long to disinherit the community spouse and significantly affect their standard of living. That surviving spouse may already be facing a smaller income and higher taxes, which I cover in the widow’s penalty and how to prepare.
Single retirees
It’s pretty common for individuals to inquire about long-term care (LTC) insurance. When I ask why they want LTC insurance, I typically get a response like, “I don’t know, I figured I would need it to get care.” If you are single and your primary concern is to pay for care in a decent facility, I don’t agree with purchasing insurance.
Why? If you have a balance of $500,000 in TSP, that’s a good sized sum to pay for your own care. You will also have cash flows like your FERS annuity and Social Security to help. Home equity is another resource that could be used if needed. And if you run out of money, then Medicaid will kick in (eligibility rules vary by state).
If you are single and concerned about disinheriting your kids, then you have a valid concern. If your concern is only about getting good care, then maybe you should consider not insuring the risk.
How to pay for long-term care: three options
If you decide that long-term care is a serious risk to your retirement, the next thing you need to do is decide how to pay for care. There are three basic ways of paying for care:
- Pay out of cash flow
- Purchase long-term care insurance
- Purchase life insurance
#1 Pay out of cash flow (self-insure)
It takes some planning to figure out if you will be able to sustain an extra expense of $75,000 a year for five years (example) in retirement. If an expense like this will seriously reduce your assets, then you can’t pay out of cash flow. If the added expense doesn’t affect the income of the community spouse, then you can afford to pay for care out of cash flow. A projection of how your TSP in retirement holds up under a few years of care costs is a good place to start.
If your strategy is to pay out of cash flow and a spouse ends up needing care, you still have options. There are many elder care attorneys who specialize in protecting assets from nursing home costs. If you find yourself in this situation, I would encourage you to seek out a qualified attorney and explore your options.
Risks: Potentially having to pay a very large expense.
Benefits: No insurance cost.
#2 Purchase long-term care insurance
This is possibly the best way to protect your assets. Purchasing insurance means a daily or monthly benefit amount will be paid out if you can’t perform a minimum of two activities of daily living. There is typically an elimination period anywhere from 30 to 360 days that works like a deductible.
Private companies offer more benefit options in LTC policies. One benefit that I believe is worthwhile to consider is a shared care benefit. Shared care policies allow two spouses purchasing a policy to share the sum of their benefits. For example, if both spouses purchase a 3-year benefit policy and one spouse dies without using the benefit, the living spouse still has access to 6 years of benefit. The shared care policy increases your odds of using the benefit.
Two big risks of purchasing insurance are dying without ever using the policy and increasing premiums. Premiums on LTC policies are designed to stay the same, but are not guaranteed to. Regardless of what type of LTC policy you choose, there is a risk of a premium increase.
Risks:
- Dying without needing care and losing the cost of premiums
- Increasing premiums
- Monthly benefit doesn’t keep pace with inflation
Benefits:
- Arguably the best way to protect your assets
Can federal employees still buy FLTCIP coverage?
Not right now. I used to tell federal employees to look at the Federal Long Term Care Insurance Program (FLTCIP) first. That option is on hold. OPM suspended new applications in December 2022 and, in late 2024, extended the suspension through at least December 19, 2026. During the suspension, new employees, retirees and family members can’t apply, and current enrollees can keep their coverage but can’t increase it. Check the FLTCIP website or OPM for the latest status before you make a decision.
The program is also a good illustration of premium risk. In 2016, FLTCIP premiums went up an average of 83%, and in 2023 many enrollees were notified of another round of increases starting in January 2024. Those increases varied by plan, with some as high as 86%, and for some enrollees they were phased in over three years. If you already have FLTCIP, you can generally keep your coverage and pay the higher premium, reduce your benefits to keep your premium closer to where it was, or leave the program. That decision deserves a careful look at your other assets before you drop coverage you may not be able to replace.
#3 Purchase life insurance
Buying life insurance to pay for LTC risk is becoming more common. There are two ways that life insurance can help pay for LTC. The first is by replenishing assets with the death benefit. Payments for qualified long-term care services can count as medical expenses, which are deductible to the extent your total medical expenses exceed 7.5% of your adjusted gross income (AGI) if you itemize. In a year with large care bills, that deduction can offset much of the tax on money withdrawn from TSP and IRAs to pay them, making those distributions fairly tax efficient.
The second way of paying for LTC with life insurance is to purchase a policy with an LTC rider or chronic illness rider. These riders allow a person to access the death benefit prior to death to pay for specified illnesses.
The biggest benefit of buying life insurance to pay for care is that someone is guaranteed a benefit. As long as you pay the premiums, your beneficiary will get a benefit. For more on how life insurance fits into a federal retiree’s plan, see the problem with having no life insurance and survivor annuity versus life insurance.
Risks:
- Inflation reduces the value of your benefit
- It isn’t the best way of receiving a benefit while you are alive
Benefits:
- Provides a guaranteed benefit that will be paid out either while you are alive or at your death
- Premiums can be guaranteed not to increase, depending on the policy
Should you buy long-term care insurance?
There is no one size fits all answer to paying for long-term care, BUT it is a valid risk that everyone should consider. A care bill that runs into six figures a year can be detrimental to any retirement plan. I would highly recommend some retirement cash flow analysis to see how your family would be affected should you need care, and it is worth doing before you make your benefits decisions at FERS retirement. If you are nearing retirement and need help with issues like these, you can schedule an initial call here.
Brad Bobb, CFP®, Bobb Financial, is an expert in federal benefits and retirement planning for federal employees.
This article is for educational purposes only and is not individualized financial advice. Figures are illustrative.