At least 70% of people over age 65 will require some type of long-term care in their lifetime, according to the National Medicare Handbook. Costs of long-term care can be high, and may not be covered by other forms of insurance (including Medicare), so this is one expense you definitely need to prepare for in order to protect your retirement savings.
Long-term care has gotten expensive
According to a survey by Genworth Financial, costs of the major types of long-term care have all grown significantly over the past five years.
What does my health insurance and Medicare cover?
The short answer is "not much" when it comes to long-term care. Medicare, private health insurance, and Medicare Supplemental Insurance all have little long-term coverage.
Health insurance and Medicare will typically only pay for "skilled, short-term, and medically necessary" care, according to longtermcare.gov. Coverage is limited to the first 100 days, and a skilled nursing stay is only covered if it follows a hospitalization for the same condition.
Medicare Supplement Insurance, or "Medigap," isn't much help either. While this form of insurance is designed to enhance the benefits you get from Medicare by covering copayments and deductibles, it is not intended to meet long-term care needs. Even disability insurance won't do you any good. Not only does disability insurance not cover medical care or long-term care services, it also doesn't provide any benefits once you're past age 65.
Long-term care insurance
Fortunately, there is a way to prepare for the costs and protect your savings, known as long-term care, or LTC, insurance.
Long-term care insurance is designed to cover the costs of long-term services and supports including skilled nursing care, help with personal care activities, and various types of therapy (occupational, speech, physical, rehabilitation). Benefits can be used for care in several settings, including:
- In your home
- Adult day care centers
- Hospice care
- Respite care
- Assisted living facilities
- Alzheimer's facilities
- Nursing homes
Long-term care policies are based on two main factors -- the daily benefit and the benefit period, which combine to produce a lifetime maximum benefit. For example, if your long-term care policy reimburses $150 per day for three years, it has a lifetime maximum benefit of $164,250 ($150 times 365 days/year times three years). Many LTC policies also protect against inflation -- that is, as the cost of living rises over time, the policy's benefits increase accordingly.
In order to receive benefits from an LTC policy, two criteria must be met. The first is known as the "benefit trigger," which refers to the symptoms requiring long-term care. This is usually defined in terms of the policy holder's ability to perform activities of daily living, or ADLs, which is assessed by a healthcare professional. Once that requirement is met, the second thing you'll need to do is satisfy the elimination period, which is the time you need to cover the costs of care before insurance kicks in. Typical elimination periods last 30-90 days, and depend on your policy's terms.
The sooner the better
One common mistake people make is waiting until retirement to apply for LTC insurance. This is a bad idea for two reasons.
The first is that as you get older, you have a higher chance of being rejected for LTC insurance. Only 17% of applicants between the ages of 50-59 were declined for coverage in a recent year, but this increases dramatically to 45% for those between 70-79.
|Age group||% of applications declined|
Long-term care insurers consider a variety of health factors when deciding whether or not to approve applicants, and other than some obvious factors (such as already having Alzheimer's disease or requiring LTC services), being in poor overall health can result in rejection. So, it's better not to wait until your health potentially declines.
Additionally, LTC insurance policies can be significantly cheaper if you apply earlier. According to the American Association for Long-Term Care Insurance, a 60-year-old couple can expect to pay 26% more than a 55-year-old couple for the exact same LTC policy.
For 2015, a healthy 55-year-old man and woman can expect to pay about $1,060 and $1,390 respectively, per year for $164,000 in potential benefits. Married couples can usually get a discount for buying one combined policy, and there can be a huge cost difference between different insurer's policies, so it pays to shop around.
A small price to pay for peace of mind
While it may seem like a burden to add a few thousand dollars to your annual expense now, long-term care costs could erode your retirement savings rather quickly. If you're in the pre-retirement stage (say, 50 years old or older), it might be a good idea to start looking into your LTC options before you're older and costs start climbing out of reach.