Americans are living longer than ever and that can be good news and bad news. From a retirement planning perspective, it increases your chances of needing some sort of expensive long term care (LTC) such as a stay in a nursing home. And currently, the American Society on Aging estimates that 70 percent of people over age 65 will require this type of assistance before they die. That makes long term care insurance (LTCI) an important consideration for today's aging adults.
Long-term care includes a wide range of medical and support services for the ill or elderly. The services exist to help people who have trouble with everyday activities most people take for granted, such as eating, bathing, or dressing. Beyond nursing homes, long-term care can also take place in assisted living facilities, home care arrangements, or other settings.
With any of these services, the chief concern is the incredibly high cost. According to the Genworth Cost of Care Survey, an industry benchmark, just one year in a nursing home can cost more than $75,000. And with costs increasing at about five percent annually, the price tag could skyrocket to $185,000 to $300,000 per year in 20 or 30 years. While it takes most people decades to build the financial security they need to retire comfortably, it?s easy to see how just a few years of LTC could potentially wipe out all of that hard work.
LTCI is specifically designed to prevent that type of devastating financial impact. With a policy in place, the insurance company will help cover your costs if and when you need LTC. And this can help preserve your hard-earned retirement fund for the years you have left, or to pass an inheritance to your heirs.
Importantly, preparing for the possibility of LTC is a challenge most retirees must address on their own. Tri-Care and Medicare don't cover most LTC expenses, and Medicaid is reserved for people who have nearly depleted their retirement savings. Furthermore, Veterans Administration hospitals limit LTC on a "space available" basis. So, LTCI is often the only option to safeguard your retirement assets - and your way of life.
Weighing the Costs
Because of the potentially enormous costs of LTC itself, the insurance also tends to be a considerable expense for policyholders. But it may not be as costly as some might think. For example, a 60-year-old married person in average health could expect to pay around $2,000 a year for the coverage. More than pocket change, to be sure, but the likelihood of needing LTCI in the future makes the cost worthwhile.
Let's assume you remain moderately healthy for many years and don't need long-term care until you're 85 years old. If you chose to buy LTCI at age 60, it means you would pay for the coverage for 25 years before you needed it. At an annual cost of $2,000, you?d pay a total of $50,000 for insurance before ever filing a claim. A bum deal? Not s' fast.
Now imagine how forgoing insurance could affect your retirement savings. Again, the industry predicts that in 20 years, each year in a nursing home could cost around $185,000 (more than $500 a day). Paying the total expense from your personal savings, you'd pay $925,000 after only five years. That bill could be enough to severely deflate or even empty your retirement fund. If you're fortunate enough to recover and care for yourself again, you may return home to financial hardship. Or, if you spend your final days in a nursing home, it could erase the inheritance you'd hoped to leave your children, and even put the financial burden on them to pay for your care.
However, LTCI will help you make up your $50,000 in premiums in just a few months.
What and When to Buy
If you decide LTCI is for you, never make a purchase without doing some research first. Active and retired military personnel qualify for the Federal Long-Term Care Insurance Program (FLTCIP), but it?s not always the least expensive. It's important to compare the costs and options of both government and private insurance companies and be sure you completely understand what's covered.
The two main components of a LTC policy are the "daily benefit," which is the maximum amount the insurer will pay for services per day; and the "benefit period," which is how long the policy will pay for your LTC services. Be sure to choose levels that reflect the projected costs in your area, and a timeframe you're comfortable with. Of course, as you increase your level of coverage, your premiums will also rise.
As for timing your purchase, buying LTCI while you're young and in good health results in lower premiums. But even if you've been retired for years, it's not too late to find a insurance solution that works within your budget.
With no crystal ball to see the future, deciding whether you need LTCI can be a complex process of balancing your risk with your financial resources. Consulting a financial planner can help you choose the right path and find peace of mind in your decision.
About USAA USAA, a diversified financial services company is the leading provider of competitively priced financial planning, insurance, investments, and banking products to members of the U.S. military and their families. Named by BusinessWeek as 2007?s Customer Service Champion and ranked highest among financial services companies for customer advocacy in a Forrester Research survey, USAA provides convenient and accessible financial products to its more than 6 million members. For more information about USAA, or to learn more about membership, visit usaa.com.
USAA is a diversified insurance and financial services organization that has served the military community since 1922. USAA Financial Planning ServicesSM refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency, and its wholly owned subsidiary. USAA means United Services Automobile Association and its affiliates.
Joseph "J.J." Montanaro is a CERTIFIED FINANCIAL PLANNERTM practitioner with USAA Financial Planning Services, one of the USAA family of companies. A West Point graduate, Montanaro served in the U.S. Army for six years on active duty. He is currently a Lieutenant Colonel in the U.S. Army Reserve.