You probably don't like to think about the idea that your health may decline to the point that you'll need help with day-to-day activities. But it's important to face the facts: According to the U.S. Department of Health and Human Services, a person turning 65 today has almost a 70% chance of needing long-term care services at some point in his lifetime.
What is long-term care?
Long-term care, also called custodial care, refers to professional help with "activities of daily living" (ADL), as medical providers call them. These activities include:
- Using the toilet
- Transferring (to or from a bed or chair)
- Caring for incontinence
Typically a person will qualify for long-term care when their doctor or health provider certifies that they're unable to perform at least two of the ADLs from this list.
How will I pay for long-term care?
If you live long enough, you'll likely need some form of long-term care. While you may be able to get some free help from a relative, it's possible that no one will be available or able to provide the level of care that you end up needing.
Unfortunately, Medicare does not cover the cost of most long-term care services because they aren't technically medical services. Medicare will pay for skilled nursing services, but it will only cover a maximum of 100 days in a nursing home, and it won't pay at all for home aide services (when a person comes to your house to help you with ADLs and other basic activities). Medicaid will cover such services, but not until you've exhausted all other resources and are essentially broke.
If you have money set aside in a health savings account (HSA), you can use those funds to pay for long-term care. Another option is self-insuring -- that is, setting money aside in a dedicated investment account with the intention of using those funds 25 or 30 years in the future when you need long-term care. However, it can be difficult to fund such an account to the level you may require. According to Genworth Financial's annual Cost of Care Survey, the median monthly cost for a home health aide in 2016 was $3,861, and a semiprivate room in a nursing home cost $6,844 a month. What's more, you might need those funds before the 25 to 30 years of growth are complete.
How about long-term care insurance?
Long-term care insurance reimburses its policyholders a set daily amount for services that help you with your ADLs. Some policies are idiosyncratic when it comes to the services they cover, so read the fine print carefully before you sign. Most policies require medical underwriting, which means that if you're already in bad health or currently receiving long-term care, you probably won't qualify for a new policy.
Long-term care insurance premiums are notoriously high. You can expect to pay several thousand dollars a year in premiums, and the rates rise steeply if you wait until you're 65 or older to buy a policy. Paying long-term care insurance premiums from an HSA is allowed and will at least give you a small tax break on the money.
Some companies offer hybrid life/long-term care insurance policies, which often have fixed premiums. This can save you from a sudden, steep rise in premium costs as you age. These hybrid policies will also pay out part of the long-term care coverage as a death bonus if you end up not needing to use it, which means you'll get something back for your money.
So should I buy long-term care insurance?
Unless you're sure you have another way of paying for these services, consider getting a long-term care or hybrid life insurance policy. The best time to start looking is in your 50s, because you can lock in much lower premiums at that point than if you wait until you're older (but check the policy carefully to see what their practice is for raising rates over time). When pricing out policies, keep in mind that you don't need to buy an enormous policy to cover every possible expense; should you end up in a nursing home (typically the most expensive form of long-term care), your Social Security benefits and retirement savings will take care of at least part of the cost.
What's more, if you're in a nursing home you'll likely have much lower day-to-day expenses, since you won't be spending your own money on things like food, and basic medical care. Check your Social Security statement and the status of your retirement accounts and factor those funds in when deciding how much long-term care coverage you'll need. And remember that like most insurance policies, a long-term care policy gives you one benefit right away: peace of mind.