Long-Term Care Insurance: Five Things to Consider Before Buying a Policy

Why you may need long-term care insurance

If you’re approaching retirement, you’re probably aware that there’s a good chance you’ll someday need long-term care. The U.S. Department of Health and Human Services estimates that over 70% of adults aged 65 will need long-term care. 

There are two key details about long-term care that everyone thinking about retirement needs to know:

• Long-term care is expensive. In 2023, average costs ranged from $5,350 per month for a one-bedroom unit in an assisted living facility to $9,733 for a private room in a nursing home. And these sums are almost certain to grow every year. (via carescout.com)
• Most long-term care costs aren’t covered by Medicare or other health insurance plans. Unless you qualify for Medicaid assistance, you’ll have to pay these costs out of pocket unless you plan in advance.

Planning for long-term care costs is even more critical if you’re married. Suppose one spouse becomes ill or suffers severe cognitive impairment (such as Alzheimer’s disease) and must go into a nursing home or an assisted living facility. In that case, the healthy spouse may have to take out a reverse mortgage or return to work to keep the financial burden of long-term care from eating up all of their retirement savings!

Buying a long-term care insurance policy is one of the most common solutions. However, these insurance policies aren’t cheap, so having the correct information is imperative before deciding. And because insurance companies consider your health status, not everyone can buy long-term care insurance; people with a chronic medical condition, for example, are unlikely to find an insurance company willing to sell them a long-term care policy.

Read more: What are the Chances That You’ll Need Long-Term Care? 

“Long-term care isn’t just a possibility—it’s a reality for many. Without the proper plan, the costs can quickly drain your savings and impact your family’s future. Working with a financial advisor ensures you have a strategy in place to help protect your assets, maintain your independence, and secure the care you deserve.” says Victoria Larson, CEO and Financial Advisor at Vitality Investments.

Five things to consider before buying a long-term care insurance policy:

The Right Age to Buy a Long-Term Care Policy

According to the AARP, the average long-term policy care premium for a healthy 55-year-old couple runs about $2,100 a year. For a healthy 65-year-old couple, it’s about $3,700 a year.

While that’s a significant price difference, not paying that long-term care policy premium for an entire decade means that by the time this couple reaches age 75, they will have spent $5,000 less if they bought at age 65 than 55.

Putting off buying a long-term care policy until age 65 may seem risky, and you might be worried about developing a serious health problem that could prevent you from obtaining coverage. However, long-term care claims are far more likely to be filed by people over 70. Carefully consider your health history when making this decision. If you’re in good health in your 50s, you may be able to save money by holding off on buying a long-term care insurance policy until you’re older. If you’ve had health problems, purchasing a policy sooner is better, even though you’ll have to pay premiums longer.

What You Need Your Long-Term Care Policy to Cover

The cost of long-term care has been rising every year and will likely continue for the foreseeable future. When evaluating long-term care policies, it is important to consider what type of coverage is included and any limits, such as a lifetime maximum, that could cause you to exhaust your coverage too soon. Some policies may also have a maximum daily benefit, which could limit the type of long-term care you can afford by the time that you need it — you could find that even though you need care in a nursing home, the policy will pay just enough to cover in-home care.

Hybrid Long-Term Care Annuity

A hybrid long-term care annuity combines a deferred fixed annuity with a long-term care rider.

Hybrid policies have become more popular recently because the prices of standalone long-term care insurance premiums have increased dramatically. In contrast, the number of insurance companies offering traditional long-term care policies has declined.

Hybrid long-term care annuities have benefits for both owners and beneficiaries. Policy owners can take out money at any time. If long-term care is never needed, the annuity may be left to beneficiaries without going through the probate process.

Health Savings Accounts (HSA)

A health savings account helps you save money to cover medical expenses — and saves you money on taxes in the process. Your contributions to your HSA reduce your taxable income, and earnings in the HSA grow tax-free. And when you take money from the HSA to pay for qualified medical expenses (including long-term care), those withdrawals are also tax-free. These accounts are available for people with a high deductible health insurance plan. The only catch is that annual contribution limits for HSAs are pretty low.

Medicaid Asset Protection Trust (MAPT)

While Medicare does not cover long-term care, Medicaid does have a long-term care program called Medicaid for Nursing Homes. The catch is that there is a strict income and asset limit to be eligible and a five-year lookback period (30 months in California), so retirees would have to spend down their assets in advance.

The Medicaid Asset Protection Trust is a tool that allows retirees to meet those eligibility requirements without spending or giving away all of their money. However, because of the lookback period, this trust must be set up in advance to use Medicaid as long-term care insurance.

Speak With a Financial Advisor About Your Options

Because long-term care is a significant expense and long-term care insurance is expensive and potentially complicated, it’s important to know all available coverage options, how each can help protect your retirement, and which one best matches your retirement goals.

If you’re concerned about long-term care costs in retirement and don’t have a financial advisor to speak with, we can help. One of our experienced financial advisors can help you put together a retirement plan that helps manage long-term care expenses for you and your family. Get started today by requesting a complimentary, no-obligation conversation about your retirement plan.