Do you know how you'll pay for long-term care in retirement? Long-term care refers to the sort of non-medical daily living assistance that many elderly individuals need. This kind of care might include help with eating, bathing, dressing or mobility, and the U.S. Department of Health and Human Services reports that nearly 70% of current 65-year-olds will need some type of long-term care in their lifetimes.
While insurance is one option for covering this kind of care, it's important to understand the available alternatives to long-term care insurance so you can make the best decision for your health and financial needs. Here's what you need to know about long-term care insurance and its alternatives.
What Is Long-Term Care Insurance?
Neither private health insurance nor Medicare covers the sort of non-medical long-term care services that many people need. This means retirees need to plan ahead to pay for any future long-term care, from in-home care or adult day care to assisted living or nursing homes. Investing in long-term care insurance is one strategy to plan for potential long-term care costs.
With this kind of insurance, you'll pay out of pocket for your long-term care needs and then submit proof of service to be reimbursed. Most long-term care policies have what's known as an elimination period, during which you're on the hook for the full cost of your care, and the insurance policy will begin to reimburse you when you reach the end of the period.
Traditionally, long-term care insurance was touted as an inexpensive way to pay for future care needs, since buying a policy while still in your 50s (or earlier) could "lock in" a lower premium rate. However, even though insurance companies can't raise your individual rate for a long-term care insurance policy, they can raise the rates for blocks of policyholders. Insurers often increase premiums for blocks of policyholders as the individuals in that block grow more likely to need long-term care.
The American Association for Long-Term Care Insurance reports that, as of 2021, the average annual premium cost for a 60-year-old couple was $2,600 with a level benefit of $165,000. Since that benefit is level, however, the purchasing power goes down over time due to inflation. Expect higher premium costs if you choose a policy with inflation protection.
In addition to the cost concerns, it's also important to note that not all applicants will qualify for a long-term care insurance policy. If you're already experiencing health issues, you may find that your insurance application is denied or that your premiums are prohibitively expensive. This is why it's important to be aware of alternative ways to pay for long-term care.
Alternatives to Long-Term Care Insurance
Insurance is not the only way to pay for long-term care. Savvy retirees can compare insurance policies to the following options to find the best strategy for their potential long-term care needs.
1. Linked-Benefit Life Insurance
A linked-benefit life insurance policy is life insurance that includes a rider for long-term care, thereby tackling two needs with a single policy. This kind of insurance policy offers a guaranteed death benefit as well as a pool of money available for your potential long-term care needs. In general, you can expect that the policy's death benefit will increase if you don't need to access the long-term care benefit.
If you already plan to keep a life insurance policy in place during retirement, a linked-benefit policy is a smart way to both provide for your loved ones and protect your assets from the potential costs of long-term care. However, linked-benefit policies can be somewhat expensive, and those who don't plan to carry life insurance into retirement won't benefit from them.
2. Asset-Based Long-Term Care Insurance
Similar to linked-benefit insurance is asset-based long-term care insurance. With this sort of policy, you can receive long-term care benefits in addition to or instead of the death benefit. Unlike most linked-benefit policies, there is generally no guaranteed death benefit. That means if you exhaust the total benefit for your long-term care needs, there won't be anything left for your beneficiaries. Additionally, you will be responsible for any payments above and beyond the total long-term care benefit amount. Generally, you can expect that the policy will only pay one benefit (either the long-term care benefit or the death benefit) or a smaller combination of the two, but never both full benefits.
Asset-based long-term care insurance often allows you to access your benefits tax-free as long as the money is going toward long-term care. However, like the other insurance options, premiums can price some people out of the market.
3. Long-Term Care Annuity
An annuity is a contract that has you pay your insurer a lump sum premium in exchange for regular payments starting immediately (for immediate annuities) or in the future (for deferred annuities). A long-term care annuity is usually a deferred, fixed annuity, which means you know the fixed interest rate your lump sum premium will earn over time. Additionally, your benefit is tax-free if you access it for long-term care. If you remain hale and hearty through retirement and don't need the benefit, you can pass it along to your beneficiaries.
The downside of this option is that it requires a lump sum, which not everyone will be able to put together. As an insurance product, an annuity may also require underwriting that could disqualify some seniors.
Putting money aside on your own is always another alternative to insurance. In the case of potential long-term care needs, it may make sense to set aside savings in a Roth IRA that you earmark for your future care. With a Roth IRA, you put aside money that you've already paid taxes on. The money grows tax-free and can be accessed tax-free in retirement, provided you are over the age of 59.5 and have held the account for at least five years.
Having your long-term care savings in a tax-free investment will ensure that an expensive health problem won't require you to increase your taxable retirement income, which could throw off your budget when you can least afford it.
While there is a lot to say for earmarking long-term care funds in a Roth IRA, self-insurance requires both discipline and funds. That means this option won't work for everyone.
5. Family and Friends
Many retirees end up relying on unpaid long-term care from their loved ones. While being able to rely on your family and friends for care can be a wonderful bonding experience, it can also put an undue burden on the people you love most. Such caregiving can disrupt careers and strain relationships, so it's important to have other plans in place if possible and to be mindful of any signs of caregiver burnout or fatigue.
The Bottom Line
Long-term care can put a financial burden on a retirement budget, but with sufficient planning, you can find assistance that fits your situation. While long-term care insurance is one option, it's important to explore alternatives like linked-benefit life insurance, asset-based long-term care insurance, long-term care annuities, self-insurance and assistance from family and friends. Knowing your alternatives can help you find the right option for your health and financial needs.