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. There is a near 70% chance that individuals over the age of 65 will need some form of long-term care at some point in their lifetime. 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.
What is the risk?
The risk associated with long-term care is spending your all of your retirement assets on long-term care expenses when you can no longer care for yourself.
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 (spouse needing care). At an annual cost of $50,000-$100,000 (depending on where you are located), it wouldn’t take long to disinherit the community spouse and significantly affect their standard of living.
What about individuals?
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.
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.
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.
It’s a risk, now what do I do?
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
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.
If your strategy is to pay out of cash flow and a spouse ends up needing care, you still have options. There are many eldercare attorneys that specialize in protecting assets from nursing homes. 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 you would receive 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 is like a deductible. If you choose to purchase insurance, I would recommend looking at the federal LTC program. You can find many details about the program here. I have found the federal program to be priced competitively. The benefit options are somewhat limited compared to private insurance, but that doesn’t mean the policy is a poor choice.
Private companies will offer more benefits 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 on 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. In 2016, the federal program took an average rate increase of 83%. The previous increase in 2009 was an average of 17%. Regardless of what type of LTC policy you choose, there is a risk of a premium increase.
Dying without needing care and losing the cost of premiums
Monthly benefit doesn’t keep pace with inflation
Arguably the best way to protect your assets
#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 LTC expenses are likely tax-deductible medical expenses. Increased medical expenses would help offset taxes on money withdrawn from TSP and IRAs making distributions fairly tax efficient.
The second way of paying for LTC with life insurance is to purchase a policy with a 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.
Inflation reduces the amount of your benefit
It isn’t the best way of receiving a benefit while you are alive
Provides a guaranteed benefit that will be paid out either while you are alive or at your death
Guaranteed premiums (no increases)
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 $70,000 annual expense 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. If you are nearing retirement and need help with issues like these, you can schedule an initial call here.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.