Year-End Financial To-Do: Develop Your Long-Term Care Plan

Nov 17, 2020

By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance

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November is Long-term Care Awareness Month
Long-term care needs will vary from person to person, but according to HHS’s Administration on Aging, someone turning 65 today is 70% likely to need some type of long-term care in their remaining years.  While a little less than one-third of today’s 65-year-olds may never need long-term care support, 20% of those getting care will need it for longer than five years.  Unfortunately, this risk of needing long-term care in retirement is often the largest unfunded liability in financial planning.   Long-term care planning is often a topic people want to avoid because it requires them to imagine a time and situation that they would rather not think about—like them or their partner being seriously ill and unable to care for themselves.

The Covid-19 pandemic has given a tremendous amount of attention to nursing homes as being potential incubators of the disease.  While this is concerning, the reality is that most of the care is provided at home.  According to about 12 million seniors will need long-term care by 2020.  Of these 12 million individuals only a mere 30% will enter a nursing facility. The rest will receive long-term care in their homes.  But that care is not free.  According to Genworth, the median cost for a Home Health Aide is around $52,000 per year.  If care is needed in a nursing home, the median cost is over $100,000 per year.

Every situation is different, but everyone needs a plan.  Self-funding with your own assets is an option, but this strategy is fraught with significant financial risks.  Paying for a significant long-term care event out-of-pocket can result in a serious erosion of assets.  Taxes associated with these excess withdrawals can erode these assets even more.   An alternative to self-funding is to purchase a qualified long-term care insurance policy.

Several product types are available:

Traditional long-term care insurance policies allow you to customize benefits and features based on your specific situation and cost-of-care in your area. The annual premium of your long-term care policy is based on the type and amount of services you choose to cover, how old you are when you buy the policy, your health status, and any optional benefits you choose, such as benefits that increase with inflation. If care is needed, after the waiting period is satisfied, the policy will pay out an income-tax-free benefit up to the benefit maximum for care received. Typically, these policy types have no cash value, and no death benefit will be paid to beneficiaries.

Hybrid insurance/annuity policies provide a long-term care benefit, a death benefit, and cash value in one package. For those individuals who are self-insuring LTC expenses, or do not like the “use-it-or-lose-it” aspect of a traditional LTC policy, a “hybrid” policy may be appealing. These policies provide a tax-free pool of dollars to pay for care in a facility or in your home. If you do not need care before you die, an income tax-free death benefit is paid to your beneficiaries. In addition, some policies offer a return-of-premium feature which ensures that if the policy-owner decides to surrender the policy prior to a claim, the original premium will be returned.

Your financial advisor can illustrate the detrimental effect a long-term care event would have on your portfolio and help you develop a long-term care plan designed to alleviate this risk for you and your family.