Getting serious with clients about long-term care insurance

A 65-year-old couple retiring in 2022 can expect to spend on average $315,000 on health care and medical expenses throughout retirement — this according to a May 2022 report by Fidelity Investments. But that daunting figure fails to take into account the cost for long-term care which could cost another $225,000 or more per person. 

For clients who think it can’t happen to them, the reality is that someone turning 65 has a 70% chance of needing long-term care at some point in their lives. Twenty percent of older Americans will need it for longer than five years. The question becomes: How do Americans pay for extended care without depleting the savings and income flow meant to see them through the remainder of their lives.

One way individuals can start saving for future health and extended-care needs is by opening a health savings account. Accumulating funds in a HSA — to be eligible, a client must have a high-deductible health insurance plan — has some distinct advantages. The bank or investment account has a triple tax advantage, with a tax deduction at the time of the contribution, tax-free growth and tax-free withdrawals if used for qualified expenses. For 2022, the maximum contribution amounts for an HSA are $3,650 for individuals and $7,300 for family coverage. Those 55 or older can contribute up to an additional $1,000 as a catch-up contribution.

But even for wealthy clients with robust portfolios, self-funding alone may not be enough to meet the costs of long-term care, which can range from in-home care a few hours a day to round-the-clock care at home or in a nursing facility. The costs can run from $5,000 to up to $9,000 a month, ​​according to the 2021 Genworth Cost of Care survey. And those prices have gone up in the last few years: home care costs rose 5% year over year from 2017 to 2021, while assisted-living care went up 3% to 4% per year during that period.

One in 30
Too many people fail to plan for such an event, expecting that Medicare or Medicaid will cover their needs. But Medicare only pays for up to 100 days in a nursing home and does not cover professional LTC services provided in the home for extended periods of time. Further, the program does not pay for non-skilled home assistance, which makes up the majority of long-term care services, according to the U.S. Dept. of Health and Human Services. 

Long-term care insurance is an option that can bridge the cost of a long-term care event. But by one recent estimate, fewer than one in 30 Americans, and just 7% of those over 50, have a long-term care policy. 

To be sure, LTCI is not for all clients. It may not be appropriate for those that qualify for Medicaid as they may be able to access a level of care from their state. And not everyone who wants such a policy can have one. Per the American Association for Long-Term Care Insurance, 22% of Americans who apply for LTCI in their 50s are declined. That percentage rises to 30% for individuals in their 60s and up to 44% for those in their 70s.

Furthermore, to become eligible to collect benefits under a LTCI plan, one has to prove or substantiate their condition — usually done with doctors’ records and/or letters from the insured’s doctors stating their condition. For an individual to qualify, they must be diagnosed with a cognitive impairment, such as dementia or Alzheimer’s disease, or they must need help with two of six “activities of daily living,” or ADLs — bathing, continence, dressing, eating, toileting and “transferring.” Most policies require a 90-day elimination period, which is the time the disabled or hospitalized person must wait from the onset of their condition until coverage begins. 

The talk
Financial planners can begin the conversation by discussing the client’s family health history and longevity. A history of dementia or Alzheimer’s in a family could, for instance, suggest the need for insurance or additional insurance. Typically, retirement savings are there to fund living expenses for both spouses as they age, not for long-term care. Given the fact that so many end up requiring some type of assistance, it is important to plan for and set aside money specifically for a possible long-term care event.

Planning for long-term illnesses and securing the appropriate care needed when the time comes are complex matters. A LTCI professional and/or a financial advisor familiar with LTCI policies and the market — including underwriting and product options — should be very hands-on in discussing strategies with the client and helping them to determine the right amount of coverage, the appropriate benefit period and the multiple types of LTCI policies and their different features. 

It’s important that the advantages and disadvantages between different strategies are discussed with the client — for example, how a cash indemnity plan may or may not be more advantageous than a reimbursement-type plan. In the age of COVID, people may prefer to receive their care at home as opposed to a nursing home. Given this, cash indemnity options may gain popularity as they could provide the family with greater flexibility in the choice of caregivers. Any plan under consideration should model out three to five years of care and incorporate a LTC event starting at age 80 to 85. 

As a financial planner, it is hard to watch how long-term disability and illness negatively impacts families, particularly those who have not prepared adequately in advance. When a loved-one becomes ill, it is an overwhelmingly emotional and stressful time. Properly chosen and administered, LTCI can remove a layer of stress from the family, knowing they won’t have to figure out what to do at a very distressing time because it has already been handled. Such protection can also help alleviate potential tension and disagreements among family members regarding how much to spend on care or which assets to liquidate if necessary.