Long Term Care Cost
There is a financial threat looming on the horizon that could completely decimate your life’s savings and plans for a secure retirement. We are all aware of this threat, but little, if any, planning is done to protect ourselves and family members from its financial devastation. What is the threat? It really should come as no surprise that the largest threat to financial security in retirement is medical expenses and, more specifically, long-term care costs.
When I’m working with new clients, I will often say, “We need to modify your long-term care plan,” and they will inevitably reply, “We don’t have a plan.” This, of course, is exactly the point. There is a misconception that expenses for persisting conditions have to come from LTC insurance, savings, or the government. However, there is another option becoming extremely popular. It’s known as hybrid or asset based long-term care coverage. The benefit of hybrid long-term care insurance is it can provide tax-free wealth accumulation, protection for our family members, and, should we need the coverage, funds for long-range healthcare expenses. Let’s first take a look at the reality of medical costs during our retirement years.
The latest numbers are too staggering to continue to ignore this essential planning point. A recent Fidelity study shows that a couple turning 65 in 2017 will need $275,000 to cover medical expenses. This amount is up $15,000 from 2016. It is important to point out this is for a healthy couple. If one or both spouses are ill, you can add at least another $100,000 to that number. The largest piece missing from this $275,000 is that not one penny of it is for long-term care; this number is only for average medical expenses as we age. Yet, as we age, permanent medical expenses are the biggest threat we face to our financial security.
By the time we reach age 65, we have a 70% chance we will need some form of continuing healthcare before we pass away. Most people are aware that managing a chronic condition is expensive, but I believe they don’t truly appreciate how expensive it can be. According to the latest Genworth Financial Study, the average annual cost for a private nursing home room is a little over $97,000 per year and about $85,000 for a semi-private room. However, most of us would like to remain in our homes to be cared for. The average cost of a home health aide providing service 44 hours a week is $49,000, but what if around the clock care is needed? I live outside of Seattle where the average cost of 24-hour home nursing is $182,000 per year. These numbers are staggering, especially when we factor in the average length of time for persisting healthcare for men is 2.2 years and 3.3 years for females. A major issue related to this is that since women live longer than men, much, if not all, of the wealth has been used to care for the husband by the time the widow needs the coverage. Up to one-third of widows over the age of 75 are below the poverty line.
Understanding the devastating impact of long-range medical attention can help us properly plan. Most people in our country assume the government will cover theses costs. Medicare does not cover ongoing nursing except in limited circumstances for limited periods of time. For a couple age 65, the $275,000 average medical expenses throughout their retirement is after Medicare has paid its benefits. To qualify for government provided lifelong assistance, you must be eligible for Medicaid, requiring you to spend down your assets and falling below the poverty line. Outside of certain exempt assets, a couple typically cannot have more than $3,000 in assets and well under $2,000 per month in income. The reality is you must lose everything to qualify for Medicaid.
It’s human nature to avoid thinking about the need for LTC insurance until we get older. The problem is that as we get older, permanent healthcare becomes more and more expensive. Many people can’t afford LTC insurance, or even if they can, they don’t purchase it because of the ‘use it or lose it’ nature of most policies. If you don’t end up needing the coverage, you don’t receive any benefit for paying the expensive premiums. However, there is a cost-effective option that can use tax-free wealth accumulation to not only provide protection for our family members but also provide funds for ongoing care expenses should we need the coverage. These policies are called hybrid or asset based LTC insurance.
Hybrid Long Term Care Insurance
A hybrid or asset based LTC alternative is coverage built directly into a cash value permanent insurance policy. These benefits are often called accelerated or living benefits. These living benefits are in addition to the tax-free benefits we receive when we design the policy to accumulate tax-free wealth that we can access at any time for any reason we desire. My book, The Private Vault, and other articles I have written discuss how the policies are designed for wealth accumulation. The accelerated benefits in the hybrid policy are tied to the death benefit of the life insurance policy. The power of the accelerated benefits is these are provided at no additional cost since the insurance company is simply paying out portions of the death benefit while we are alive. There are three primary types of accelerated benefits that may be offered in a hybrid policy.
The first type of accelerated benefit, universal in most policies, is for a terminal illness. If a person is unfortunate enough to receive a terminal diagnosis, the majority of the death benefit will be paid out in a lump sum. The next type of accelerated benefit is for a critical illness. A critical illness is often defined as ALS, blindness, cancer, heart attack, and several others. These critical illness benefits will also be paid in a lump sum from the death benefit. Unfortunately, I have had first-hand experience with clients waiting to proceed forward and then be struck by a devastating illness. Just this last month, I had a client want to wait until the beginning of 2018 to start his policy instead of moving forward at the end of the summer. Two days before Halloween he had a heart attack. If he would have set up his policy in August, he would have been eligible to receive the lump sum payout. One company I work with also provides an accelerated benefit for critical injury.
Asset Based Long Term Care For Chronic Illness
The final, and often the most financially important, is the accelerated benefit for chronic illness. This benefit is most like long-term care. When we are unable to do certain activities such as bathing, feeding, or dressing ourselves, these become the triggers for long-term care coverage. These are the same triggering events for the chronic illness benefit. This benefit will pay out on a monthly basis. Unlike most long-term care policies, payments under the chronic illness benefit can be used for a desired purpose, not just to cover the actual expenses. Additionally, we don’t have the ‘use it or lose it’ risk of traditional LTC insurance. If you pass away without ever touching any of the accelerated benefits, the entire death benefit will pass directly to your beneficiary. If you do need to use the accelerated benefit, the remaining death benefit, after the accelerated benefits are paid, will pass to your beneficiary.
Not addressing the reality of the financial drain of medical expenses and the crippling impact of long-term care expenses is a fatal flaw in most retirement plans. The costs are real and rising annually, and unfortunately 70% of us will need some type of long-term care before we pass away. A hybrid or asset based long-term care policy provides a safety net to cover these expenses while providing us the opportunity to maximize supplemental tax-free cash accumulation and death benefit protection for our family.