Steve Kim – Long-term care: better to expect the unexpected
Published: 10-25-2024 8:52 AM
Modified: 10-25-2024 9:42 AM |
It is easy to think of long-term care as a problem for the distant future. After all, needing help with daily mobility, maintaining hygiene and preserving general quality of life is hard to imagine.
Compared to retirement planning, there are more unknowns. Will you need long-term care, and if so, how long will you need it for? Ultimately, there is no easy answer to these questions.
Statistics, though, point toward a high likelihood that you or a loved one will need long-term care at some point. Those aged 65 and older have nearly a 70% chance of needing some form of long-term care. What about duration? While averages are 3.7 years for women and 2.2 years for men, 20% of retirees will need care for more than five years.
While a few years of long-term care may not sound so daunting, costs can be high. The 2023 average annual care costs ranged from $68,000 for an at-home assistant to $116,000 for a private room in a nursing home. Sometimes there is the option of unpaid care given by family members, but then there are other costs to consider. Caregivers can spend many hours tending to a loved ones’ basic needs, adding strain to their own careers and free time, not to mention the emotional labor costs.
Long-term care, then, is a possibility that affects not only you but also your loved ones, making planning that much more important.
Planning for such a large unknown with high associated costs can be complicated. Lots of people will have to pay at least partially out of pocket. Others elect to pay for a substantial part of long-term care so they do not have to worry about what insurance will cover, and therefore can have more control over the type of care they receive.
But an important question remains: Other than self-funded, what payment options are there?
It is a common misconception that Medicare, which nearly everyone will qualify for, covers all medical needs, including long-term care. But Medicare only covers illnesses that the person can recover from or manage, not permanent physical or mental conditions. So while Medicare covers cancer, surgery or lab tests, it does not cover long-term care.
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Although Medicaid provides limited coverage, most people do not qualify for benefits due to the income standards. This leaves Americans with the two most-popular options -- self-funding or purchasing long-term care insurance.
In general, there are two types of long-term care policies out there -- hybrid and non-hybrid. Non-hybrid policies typically have lower premiums, and are often “use it or lose it,” like car insurance. Hybrid policies combine long-term care insurance with something else, like life insurance, so there is still a benefit even if the long-term care aspect is never used.
Hybrid policies have grown more popular over the years, perhaps because they often have a cap on the premium-paying period, protecting the insured from rising premium costs.
Indeed, the long-term care insurance industry is not without its problems. At first, long-term care insurance companies sold premiums at a low rate, predicting few people would file claims and that long-term care periods would not last very long. However, their predictions proved sorely inaccurate. There was a far greater need for care than the companies had anticipated, and many struggled to pay for it. Lots of Americans lost their coverage.
To try and stay afloat, insurance companies increased premiums year over year. Despite this, most insurers are now gone due to a miscalculated business model; long-term care insurers dropped from more than 100 to less than 12. The ones that remain carry high premiums, making payments challenging for many people.
But there is a silver lining -- the earlier you purchase a policy, the better. It is a good idea to purchase a policy between 55 and 65 years old, ideally at 55. Average annual premiums in 2023 were $900 for healthy 55-year-old men and $1,500 for healthy 55-year-old women. But if the same men and women waited 10 years to purchase policies, the premiums would be nearly double.
Prospects get dimmer as applicants age. Almost half of applicants over 70 get rejected. Applicants can also be rejected if they already have developed conditions, or have chronic health issues.
Deciding whether or not to purchase insurance and how much to pay out of pocket are big questions. The right answer is personal to you and your situation, but a financial adviser can give clarity and advice to suit your needs.
Steve Kim offers securities and investment advisory services through Gradient Securities, LLC. Member FINRA/SIPC. Gradient Securities, LLC offers investment advisory services under the d.b.a. of Gradient Wealth Management. Gradient Securities, LLC, and its advisers do not render tax, legal, or accounting advice. Brady Associates Asset Management is not affiliated with Gradient Securities, LLC.