5 minute read

Nobody wants to think about getting old, yet proper wealth planning has to face the facts: getting old is part of life, and the better prepared you are the more enjoyment you will find later in life. Plus, advances in healthcare have allowed people to extend that enjoyment longer than ever before. But that comes with cost. How can you prepare for inevitable expenses associated with a prolonged life?

Let’s first start with a definition. What is “long-term care?” There are two main elements to note:

1. Long-term care is a variety of services and support that someone may need to meet their personal care needs.
2. Most long-term care is not medical care, but assistance with basic personal tasks of everyday life, often called activities of daily living (ADLs). The five basic ADLs are eating, bathing, getting dressed, toileting, and transference.

Who needs long-term care?

• The older you are, the more likely you will need long-term care.
• It is estimated that about half (52%) of Americans turning 65 today will develop a disability serious enough to require long-term care services, although most will need assistance for less than two years. About one in seven adults, however, will have a disability for more than five years.
• Conditions such as AIDS, spinal cord or head injuries, stroke, mental illness, Alzheimer disease, or other forms of dementia, or physical weakness,
• Having an accident or chronic illness that causes a disability is another reason for needing long-term care. Between ages 40 and 50, on average, eight percent of people have a disability that could require long-term care services.

Who provides long-term care services?

Long-term care services and support generally come from:

• An unpaid person such as a  family member or friend
• A nurse, and/or home health or home care aide
• Adult Day Care
• A variety of long-term care facilities
• About 80 percent of care at home is provided by unpaid caregivers and may include an array of emotional, financial, nursing, social, homemaking, and other services. On average, caregivers spend 20 hours a week giving care. More than half (58 percent) have intensive caregiving responsibilities that may include assisting with a personal care activity, such as bathing or feeding.

How much does long-term care cost?

• Costs for long-term care have increased steadily over the years and can result in a significant reduction to savings if needed for a considerable time frame.
• On average, an American turning 65 today will incur $138,000 in future long-term care costs, which could be financed by setting aside $70,000 today. Families will pay about half of the costs themselves out-of-pocket, with the rest covered by public programs and private insurance.
• Below is the average costs for long-term care for Los Angeles County (in 2020).

Paying for long-term care

• Most health insurance policies won’t cover long-term care costs.
• Medicare only pays for long-term care if you require skilled services or rehabilitative care; Medicare does not pay for non-skilled assistance with Activities of Daily Living (ADL), which make up the majority of long-term care services.

Ways to Pay for Long-Term Care

There are a variety of ways to pay for long-term care but he majority of time individuals either self insurance by paying the costs out of pocket or purchase insurance which can either pay or supplement the cost of care.  The type of long-term insurance varies from traditional policies, to policies which are hybrids that have a long-term care component and a life insurance or annuity component.

If someone has enough resources he/she can just pay long-term care needs out of pocket. This saves the cost of purchasing insurance especially if long-term care is never needed. If long-term care is needed these expenses can result in a major drain on one’s resources especially if the need is long-term.

Types of Long-term Care Insurance

Traditional Long-term Care (LTC)

Private insurance designed to pay for LTC, either at home or in a LTC facility, either skilled or unskilled. These policies help protect one’s financial resources from the substantial expenses resulting from long-term care. Traditional LTC insurance can be expensive and most policies allow for the possibility of premium rate increases. Traditional LTC is similar to car insurance in that the benefit of paying premiums are not realized unless there is a LTC claim or need. If benefits are paid for LTC and the policy is qualified, benefit paid for LTC is paid tax free.

Hybrid LTC Policies

Links life insurance cash values with tax qualified LTC benefit. In addition to providing LTC benefits, policies generally also provide a death benefit (if insured dies before LTC benefit is paid). Payment of premium may also result in cash surrender value build up with a percentage of premiums paid being returned if policy is surrendered, the amount returned varies based on the product with some allowing from 80% to 100% return of premium.  As a result, unlike traditional LTC insurance, premiums can be recovered even if there is no long term care benefit claimed, but if LTC is needed, policy will pay a multiple of premium paid as LTC benefit.  These policies therefore can be a good fit for those  who have the resources to self-insure and can put some money aside in a form of a hybrid policy that can be leveraged into a higher LTC benefit if the care is needed. Depending on the type of policy, payment of LTC benefits are not subject to income taxes. With many of these policies, since the death benefit is pre-defined, the premiums are often guaranteed not to change which differs from traditional LTC insurance.

So, whether you are looking ahead at your own life, or helping a loved one prepare for the next years of their life, long-term care is not something to be feared. As laid out here, if properly planned for it will allow you (or your loved one) to ultimately enjoy more time with friends and family. Please reach out to us to take this important step in wealth planning.

1 Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief | ASPE (hhs.gov)
2 Who Needs Care? | ACL Administration for Community Living
3 Source: US Census Bureau, 2018 American Community Survey – 1 year, Estimates Sex by Age by Disability Status for Civilian noninstitutionalized population, male and female, Table B18101
4 Who Will Provide Your Care? | ACL Administration for Community Living
5 Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief | ASPE (hhs.gov)
6 Cost of Long Term Care by State | Cost of Care Report | Genworth, downloaded April 19, 2021