How Long-Term Care Insurance Can Protect Your Financial Plan

Did you know that 7 out of 10 people over the age of 65 will need some type of long-term care, or LTC, support in their lifetime? In 2021, the median cost of hiring external in-home care was $61,776, with an average of 56 hours per week spent performing this care.

These figures not only underscore the reality that many of us will likely need help as we get older, but they also emphasize the importance of adding long-term care insurance to your financial plan. Doing so can help insulate your assets from an unplanned and potentially costly future event. But before incorporating LTC into your plan, it's a good idea to understand the types of policies available and some common misconceptions surrounding this type of care.

What are long-term care services?

Long-term care services are the custodial care services provided to an individual to meet both their medical and non-medical needs. Individuals who may need LTC include those who suffer from a chronic illness or disability who can't care for themselves for an extended period of time. Personal care services include helping individuals with activities of daily life such as eating, dressing and bathing, as well as offering medical care.

How can you pay for LTC services?

When it comes to paying for LTC services, there are three options most people have.

• Self-funding: This may mean spending down IRA accounts, withdrawing assets in a down market or spending assets intended for your retirement or heirs.
• Relying on family and friends: This means depending on others to commit their time or money for an extended period of time to care for you.
• Having long-term care insurance: This means being able to plan while you're still healthy to have your LTC needs met in the future without depleting other assets or burdening family and friends.

For those with lower asset levels, government programs like Medicaid and the Veterans Health Administration may be available. However, it's important to note that these programs require the depletion of assets and have limitations as to how and where care is provided.

Benefits of incorporating LTC insurance into your financial plan

While some of these funding options may seem viable—perhaps you believe you can build a sizeable nest egg to self-fund—it's worth asking yourself about the reality of these options. Self-funding means putting aside even more money for your retirement, while asking family and friends to care for you can put undue mental and financial stress on the people you care about.

It's best to plan for a long-term care event while you're still healthy and have the time to do so. More often than not, an LTC insurance policy can help individuals plan for how they'd live out an LTC event.

There are numerous advantages to planning well before an LTC event. Planning beforehand can:

• Help you and your family make decisions according to your wishes
• Allow you to decide on the care location
• Reduce the financial burden on your family
• Provide you with the independence to live on your terms

If you plan early enough, you may also be able to save money on a policy because premiums are based on your age and health at the time of policy issue.

Types of LTC insurance policies

There are four main types of LTC policies. This variety is designed to help individuals select the right coverage for what they believe they'll need in the future and what makes sense financially. There are also options that may be combined with a life insurance policy.

Traditional LTC insurance: Monthly or annual premiums are paid on an ongoing basis.

Hybrid insurance: This is a combination of LTC and life insurance, where the insured pays a single premium or multiple premiums over a set period of time and offers benefits for LTC, as well as death benefit options.

Life insurance with an LTC rider: This permanent life insurance offers LTC coverage through a rider that can be elected as part of the policy.

Annuity with an LTC benefit: This is typically a single premium, deferred fixed annuity that offers tax-advantaged benefits for long-term care.

Average cost of care

The cost you pay for care depends on the level of care, location and number of hours needed from a professional caregiver. Based on the Genworth Cost of Care Survey, here are some of the most common types of care options and their associated national average cost per year in 2021.

• In-home care/home health aide: $61,776
• Adult day health care: $20,280
• Assisted living facility: $54,000
• Nursing home facility, semi-private room: $94,900
• Nursing home facility, private room: $108,405

The cost of long-term care can take up a significant chunk of your budget each year, especially because annual costs for these services are expected to rise by 3% annually. This is why making adjustments to and protecting your financial plan with an LTC policy can help ensure you're financially insulated from the impact of an LTC event.

LTC misconceptions

A barrier to someone purchasing an LTC policy is simply a misunderstanding about how care may be managed in the future. Below are some common misconceptions to dispel.

• I should wait until retirement to purchase LTC insurance. Almost half of applicants over the age of 70 are denied LTC insurance due to health issues, while only 12.4% of applicants ages 40 to 49 are denied. The younger and healthier you are, the higher your chances of obtaining LTC insurance.
• Health insurance covers my LTC expenses. Health insurance pays for medical expenses like doctor visits, surgical procedures and medicines. It doesn't cover expenses for custodial care or daily life activities like bathing.
• I don't want to go into a nursing home, so LTC insurance won't help. Almost all policies issued today cover in-home care and other options.
• Medicare will pay for my LTC expenses. Medicare won't pay for a skilled nursing facility or hospice care unless certain conditions are met. Once conditions are met, Medicare only pays for 100 days in a skilled nursing facility and may only partially cover costs. You're fully responsible for all costs Medicare doesn't cover.

The bottom line

Just like with life insurance discussions, talking about eventual care needs that come with aging can be difficult. However, having these discussions with your family and financial professional now can help preserve your financial plan for your and your heirs' futures.

With several types of long-term care policies and coverage available, there's a solution for almost every family to feel financially secure if an LTC event arises.