An Action Plan for Long-Term Care

Many people put off creating a long-term-care plan. This step-by-step guide can help you get over inertia, dread, or both.

Christine Benz 12 August, 2021 | 2:43PM
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Life expectancy is rising all over the world. However, many people delay installing a long-term-care plan. In a survey from The Associated Press-NORC Center for Public Affairs Research in the U.S., 65% of respondents age 40 or older said they had done little to no planning for their own long-term-care needs.

Even people who expect to rely on government resources if they develop a long-term-care need should think through the financial and other implications of long-term care for their retirement plans. And people who expect to rely on their own resources or purchase some type of insurance to cover long-term-care expenses should be methodical about it, thinking through their prospective coverage needs and weighing their options.

In other words, it's wise to create a long-term-care action plan as part of your total retirement plan. To do so, take the following steps.

Step 1: Gauge the likelihood of needing care.

The first step is to get your arms around how likely you are to need long-term care by familiarizing yourself with some of the data. The fact that about half of us will need some type of paid long-term care in our lifetimes and half won't suggests that we should at least plan for the possibility. After all, if I told you that there was a roughly 50/50 chance that you'd get into a car accident within the next year, is there a possibility you would go without auto insurance? That's not to suggest that everyone needs to purchase long-term-care insurance, but rather that you consider the full range of options for covering your care if you develop a need.

Step 2: Get your arms around the costs.

What would care actually cost? There are enormous variations in the cost of care based on geographic location. The data vary about average duration of care, but most of the statistics converge in the 2.0- to 2.5-year range.

Before assuming that you need a $250,000 long-term-care fund if you're going to pay for long-term care out of your own coffers (or $500,000 if you're part of a married couple), spend some time customizing those figures. Geography is important, as discussed above, as is the type of care you'd prefer to receive.

The aforementioned costs are for a nursing home, whereas most people would prefer to receive care in their homes. (That's doubly true given the enormous toll that the coronavirus took on older adults in long-term-care settings.) Hiring in-home care also seems to be cheaper than receiving care in a facility. However, it's important to remember that most other household expenses, such as housing and food-related costs, would continue with in-home care, whereas they would be bundled in with the cost of care received in a facility.

If you're part of a married couple, bear in mind that it's not at all uncommon for one spouse to need long-term care while the other remains healthy. In such situations, the couple's financial resources will need to cover the costs of maintaining the household for the healthy spouse while simultaneously paying for long-term care.

You'll also need to factor in inflation when ballparking potential long-term-care costs.

Step 3: Assess available resources.

Armed with a reasonable estimate of how much long-term care might run you, you can then go back to your total in-retirement portfolio. Are your assets sufficient to cover your ongoing living expenses, based on a reasonable withdrawal rate strategy, plus the additional long-term-care costs?

If the answer is "yes, comfortably," you probably have enough to self-fund long-term care; proceed to Step 4. If your plan is tight, purchasing some type of insurance--even if it seems costly--is probably the right way to go; skim Step 4 and go to Step 5. (I say "skim" Step 4 because even if you purchase an insurance product, you'll likely need to pay for at least part of your long-term care out of your own assets.) If your in-retirement budget is so tight that setting aside a long-term-care fund or purchasing insurance isn't an option, public resources would be the default.

Step 4: Create a long-term-care fund: How much, where, and what.

If you've determined that self-funding long-term care is the right way to go, the next step is to put in place a concrete plan for doing so. If you determined the potential cost in Step 2 and you're still saving for retirement, you could simply incorporate that additional need into your retirement-accumulation goal and recalibrate your savings target accordingly. Automating your contributions by using an automatic investment plan at your mutual fund firm or brokerage company can further instill discipline in the process of building up a long-term-care fund.

As you prep for and enter retirement, it will be essential to separate any assets earmarked for long-term-care needs from your spendable assets, so that your long-term-care money will actually be there when you need it. I like the idea of creating a distinct long-term-care "bucket," segregating those assets from your other retirement assets. You could think of this as a multipurpose "last-stop" bucket that you could use to cover long-term-care needs, defray your living expenses if you live well beyond your anticipated life expectancy, or pass on to your heirs. 

Finally, think through how to invest your long-term care fund, based on your expected proximity to needing to tap it for long-term-care costs. Generally speaking, the older you are, the more conservatively positioned your long-term-care fund should be. The long-term-care funds of younger savers, meanwhile, can and should be more long-term-oriented and stock-heavy, because overcoming long-term-care expense inflation is a key part of the challenge.

Step 5: If insuring is the answer, investigate whether a stand-alone or hybrid policy makes sense.

If you've decided to purchase insurance coverage for long-term care, there are two main options for doing so: stand-alone long-term-care insurance policies and "hybrid" life/long-term-care or annuity/long-term-care products.

The stand-alone policies are pretty straightforward: It's fairly simple to compare costs and benefits across these plans, and you can and should check up on the financial health of the insurer behind the policy. Yet many consumers who thought they were doing the right thing in purchasing the policies have had an unhappy experience: Premiums have jumped up, forcing policyholders to choose between higher outlays or reduced benefits. The number of insurers offering products in this market has also shrunk. Qualifying for coverage may also be an issue for would-be purchasers of stand-alone policies.

If you don't like the idea of paying premiums for a stand-alone long-term-care policy that you may never need, or you can't purchase such a policy because you have a disqualifying health condition, you can investigate hybrid life/long-term-care or hybrid annuity/long-term-care policies. Such products have experienced dramatic growth even as sales of stand-alone policies have plummeted. Not only do they have an attractive "multitasking" quality--premiums won't be for naught if the purchaser ends up not needing long-term care--but health screening is often less stringent than is the case with stand-alone long-term-care policies. Additionally, the hybrid policies are often purchased with a lump sum, which means that policyholders won't face the same premium increases that traditional long-term-care insurance policyholders have had to face.

Yet, even as hybrid policies can make sense in certain instances, there can be significant drawbacks, too. As with any product that isn't straight insurance, the various features (and the fees associated with them) can make it difficult to comparison-shop. Perhaps more important, purchasing a long-term-care policy today may not look like such a savvy move in hindsight, especially if the premiums on stand-alone long-term-care policies stabilize and/or interest rates trend up--both realistic scenarios. 

If you do decide to purchase a hybrid policy, one good option is to exchange a life insurance policy that you no longer need for the hybrid policy.  

This article was originally written for an American audience


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Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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