Long Term Care 101 (Cost & Benefits Explained)
Ryan Kolden:
Do you know how much the average 65-year-old American couple will spend on healthcare in retirement? Well, according to Fidelity's 2023 healthcare cost estimate, the price tag on that is $315,000, which is $157,000 for a single person. Now here's the kicker. Those numbers are without long-term care. In this video, I'm going to explain what long-term care is, the pros and cons associated with it, and some strategies for making it a part of your financial retirement plan. Welcome to Retirement Simplified, where we focus on making complex retirement concepts simple. I'm your host, Ryan Colden. Join us as we talk about the strategies and tactics that can help you achieve your retirement goals.
Disclaimer & Disclosure: Ryan Colden is an investment advisor representative of RPG Family Wealth Advisory. Colden Wealth is a DBA of RPG Family Wealth Advisory. The opinions expressed by the host and or guests in this podcast do not necessarily reflect the opinions of Colden Wealth or RPG Family Wealth Advisory. No information on this podcast should be construed as as investment, legal, tax, or financial advice.
Ryan Kolden: So today we're going to be discussing planning for long-term care. And real quick before we begin, if you're getting ready for retirement and you want to see how you're doing, go ahead and check out my First Step Retirement Planner. The link is in the description. Now, a sudden long term care event can be absolutely devastating to your retirement as well as your finances. Just like home insurance, just like auto insurance, liability insurance, having long term care can really go a long way with your financial life in retirement. So just like home insurance, just like auto and liability insurance, having long term care can protect your finances in case the unthinkable happens. So why do we care about long-term care? Well, because of advances in medicine as well as healthcare technology, people are living longer than ever before. And because of this, people are needing long-term care due to increases in age-related illnesses, as well as disabilities and chronic conditions. And these would include things like dementia, Alzheimer's, arthritis, just to name a few. Now, when I speak to people about long-term care, most people really are quite shocked at the sticker price when they learn about how expensive it can be. So I want to share with you real quick some numbers just so you can wrap your head around the cost associated with long-term care. Now, a private room in a nursing facility is going to cost around $8,500 per month, and that's the average nationwide, which is about $102,000 annually. An assisted living facility is going to be a little bit cheaper on average, coming in at $4,500 per month. while hiring a caretaker can start you about $25 per hour. Now, one thing to keep in mind is that all of these costs can vary significantly, and it really depends on a couple of different factors. The first being your state. So coverage and the amount of coverage and the cost is going to vary by state and even sometimes by county as well as city. Additionally, it's also going to vary with things like the facilities, amenities, the level of care needed, and the geographic location. Now, one of the things to take in consideration is the average time spent in long-term care. So that average length of stay for a long-term care facility is about 3.2 years. using those numbers and the average length of stay, let's just run a rough estimate of what it would cost to stay in long-term care. So using the private nursing home of $102,000 per year, and assuming that we have a two-year stay, so one year less than the average, that's going to run us $204,000. And at the average day of three years, that number becomes $306,000. So that is over a quarter of a million dollars just in long-term care costs alone. So as you can kind of already piece all of this together, long-term care can be extremely costly. And this is an issue for a couple of reasons. Number one, a long-term care stay can potentially deplete your retirement funds rapidly. And this is why we ultimately care about long-term care in the context of both retirement as well as financial planning. And because of that, having long-term care insurance can help mitigate this financial risk or this financial burden that can pop up in retirement unexpectedly. Again, just because that long-term care insurance can cover a significant portion of the expenses incurred by a stay in long-term care. Now, I want to dive into the benefits a little bit deeper. And so the first benefit, and we kind of already dove into this, is preservation of assets. Now, without long-term care insurance, individuals may have to spend on their assets in order to qualify for Medicaid. Now, Just in case you get confused between Medicare and Medicaid, Medicare is for people that are over the age of 65, while Medicaid is the government assistance program. Now, one huge misconception about Medicare is that it covers long-term care expenses, and this probably isn't going to be the case. So Medicare is only going to cover health problems. It's health insurance. It's not long-term care insurance. So in order for Medicare to cover long-term care, you have to be in the hospital for a health-related condition. First, then it's going to only cover long-term care for about 100 days. And for a significant portion of that stay, you're going to have a hefty co-pay. And after that, it doesn't pay anything. So Medicare doesn't cover normal long-term care expenses, especially not over a long-term horizon. So remember that we just said the average stay in long-term care facility is about three years, and Medicare is only going to cover a portion up to 100 days. So just to recap, the first benefit of long-term care is that it allows individuals to preserve their assets for their spouse or their heirs after their passing. The next benefit that long-term care can provide is choice and control. So having long-term care coverage gives you more options as well as control over how you receive care. So as an example, there's a huge variety in the types of facilities that you can choose from, right? All the way on the spectrum, everything from private home care to hospice care. Now, if you have the ability to pay, I would assume that you would most likely want to have the highest quality service that you can. So as an example, someone who may not have long-term care insurance may first have to go through spending down all of their assets before qualifying for Medicaid. And then once being on Medicaid, you're going to have to go into a facility that the government chooses for you, a public facility. Now, on the other hand, someone who has that long-term care coverage in place is going to get the ability to choose, you know, you know, do I, do I want to have in-home nursing care or do I want to have a private nursing room in a facility? And again, the difference between those two choices is ultimately be a personal choice as well as come down to cost. Now, I think the next overlooked benefit of long-term care is going to be relief for family members. This is kind of a heavy topic to talk about, but it's important. If you were to go into long-term care, think about who would take care of you if you couldn't pay for it. Is it going to be your wife? Is it going to be your child? And I kind of know this from firsthand experience. So having to take care of a sick family member can be psychologically tolling. So not only do you have to take care of your work each and every day and all the stuff that comes with life, but also taking care of your kids if you have them. And then finally, doing all of those things while also taking care of a sick parent or a parent that needs assistance. So having long-term care insurance really can ease that burden. both physically, mentally, and financially. And it can really reduce the emotional and financial stress that comes from being a caretaker, right? Again, if you're working full-time and then also trying to be a full-time caretaker, it's going to put a lot of emotional baggage onto you. And this is really just my opinion. However, I think this is going to become a huge issue in the next… It's already a pretty big issue. I talk to people about this quite frequently. But I really think in the next 10 to 30 years, this is going to be a headline issue. And again, I've seen this firsthand. emotional drain that it can cause family members. And just as another data point, I spoke to a prospective client about a year ago at this point. And just a story, they told me that they had spent down the entirety of their IRA and were starting over again to build back their expenses. And at this point, they were in their late 50s, right? And I can't even imagine what that would have been like. But the reason they had spent down about $600,000 of their IRA was that they were paying for long-term care for a parent. And the last benefit that long-term care could potentially provide is tax benefit. So depending on the policy and your individual circumstances, the premiums that you pay associated with that long-term care may be tax deductible, right? And so that's just one more thing, depending on, again, the coverage that you purchase, it could be tax deductible. And at the end of the day, we don't really know how long we're going to live for. We don't know if we're going to need long-term care, but the way that you should think about long-term care and how to incorporate it into your financial and retirement plan is in the context of risk mitigation. Now, with the cost of long-term care rising and the unpredictability of future health needs, what long-term care coverage ultimately serves as is a risk management tool. Think about it just a couple of different ways. If I have a million dollars when I go to retire and potentially long-term care could cost me $300,000, if I spend throughout retirement and then have a long-term care event, how much is it going to cost? How long will I stay for? We don't really know, but what happens in maybe not the optimal scenario where I do have to go in, I spend down a significant portion, $200,000, $300,000. And then I pass away and my wife inherits our financial situation. So these are the kinds of things that you should be thinking about. Now, someone who has a significant nest egg, 10, $20 million, and they are at zero risk of spending on everything they have. Maybe they don't want risk, or maybe they don't want to have long-term care insurance because they have the ability to self-insure. Or maybe that person does want it and the reason they do want it is because they want to have the best facility in long-term care and they want it to not be They wanna maximize the amount of wealth they leave behind for their heirs. So again, these are just all things that you should be thinking about. Now, naturally the next question that comes along after we talk about the pros and cons of long-term care are what are my options? And generally speaking, there's about three ways that you can address long-term care. This is not all encompassing, but these are three main ways that I know personally how to address long-term care. And the first one is what I just call, And the first one is the traditional approach. Traditional long-term care, this is what people have heard about for years. And what happens here is you get underwritten, and then you start paying a premium. And again, a premium is just a word for how much you're paying out of pocket for that coverage. And let's say, for example, that the policy, the premium, the long-term care insurance, is going to cost you $500 per month. What do you get for $500 per month? In this case, let's assume that you get a daily benefit for long-term care of $200 per month. So for your $500 per month, in the event that you need to go into a long-term care stay, the insurance company is going to pay $200 per day. And that's typically how insurance companies express a long-term care benefit. They give you a premium for an associated dollar benefit per day. So in this case, $500 per month gets you a $200 per day benefit. It's pretty straightforward. Now, there is a little bit of small print that's built in there, but generally speaking, that's what you're going to get. Now, the downside to this, and many people have experienced this in recent years, is whether it be them personally or their parents, but you buy this policy and that there's a chance that this premium's increased, right? That the premium goes up in the future. This premium is not contractually guaranteed. And what happens is if the premium increases in the future, well, either you're going to have to reduce your benefits so your premium stays unchanged, or you're going to have to increase the benefit in order to keep your policy and the premium payment the same. And I'm not saying that this is going to happen, but it has happened in the past, and there's a high risk that it could happen again in the future. Now, What's the downside of this happening? So let's just take an example that you pay $500 per month, and then in the future, your premium goes up. So the insurance company gives you a letter and they say, if you want to maintain your coverage, you need to pay us more or you can reduce the amount of coverage you have to keep the same benefit. So the downside of all of this is, let's say you're paying premiums. Let's say you're relatively young, speaking 50 years old, 60 years old, and then for the next 15 to 20 years, you make premium payments of $500 per month for the next 10 to 15, 20 years. The downside is that if you never use this policy, there's a potential and a high likelihood that you don't get any of your money back. And most of the time there's no death benefit and there's no cash value associated with these types of policies either. You're strictly paying for long-term care insurance. And because of this, a lot of people are very hesitant to use this approach because there's the fear that you're not going to get your money back for anything. This is a solution for long-term care. It's option one and it has both advantages and disadvantages. And again, I don't want to speak for every long-term care policy that's out there because every company is different. Every policy is different. This is just generally speaking what I've seen. It doesn't necessarily mean that it is a bad choice or a good choice, right? The next strategy is what I refer to as the lump sum strategy. And what I mean by lump sum is that you can take a set of money and you can pay it up 100% upfront. Whether it's a single lump sum payment or maybe it's a series of smaller payments, The benefit of doing this is that the chance of increasing your premium essentially goes away by paying your policy up front. Contractually, what you're doing is you're paying a premium, and that premium is set, and what they're gonna do is, in exchange, give you a contractually guaranteed amount of benefit in return. Another benefit to this lump sum strategy is that you get the long-term care benefit that you need and that you want but this policy also has a death benefit as well as a cash value associated with it. And what's great about this option is that if you don't use the policy, you at least get some of your money back. In some cases, you can get all of it back plus some interest. Now, the trade-off and the disadvantage of this policy is usually the rate of growth that's offered in these policies or types of strategies is gonna be significantly less than what you could get in the market. But at least the benefit of this is that you can get all of your money back or the majority of it back plus some interest at the end if you don't use it. And depending on your health and age, something like this could cost, let's say $50,000 just as an example. And it could give you a long-term care benefit of $100,000 to $150,000 or two to three times what you put into it. you may not get as much long-term care benefit as option one. And just going back to option one real quick, traditional. The traditional option usually gives you the most amount of coverage for the least amount of dollar. Again, it's just kind of hard to predict whether or not it will be, the premiums will go up in the future. And they most likely will. Again, I can't predict the future, but they've gone up in the past and the insurance companies have increased the rates on people. Now, again, with this option two, you may not get as much coverage as option one or benefit as option one, but the benefit of knowing that, hey, there's back doors to getting some of my money back or getting all of it back makes this strategy preferable to the traditional route. In the third option, I called a hybrid option. And this is where you buy a life insurance policy and put a long-term care rider on top of it. And what's great about this option is that you still get the death benefit with the life insurance, and then there's still some cash value most likely, and you're still getting a long-term care benefit that you both want and need. A big difference being you're going to be underwritten as a life insurance policy rather than a long-term care or the hybrid policy that I talked to you about. And just depending on your health and your age and your medical condition, but this type of underwriting process could either help you or it could hurt you. In most cases, if you're not super healthy, this could most likely hurt you. Now, this kind of policy, what it requires is number one, a health interview. It's also going to require a blood and urine sample as well as a doctor's visit. So, the underwriting could take a couple of weeks. But what's great about the life insurance policy option with a long-term care writer, there's a chance that your death benefit will be significantly larger than in, say, option one and two. So if we're trying to think about legacy in estate planning and doing that all with the same dollar, you can get a tax-free death benefit for your heirs, and you can also get a long-term care benefit while you're living just by adding it on top of your insurance policy. And if you ever need that death benefit while you're living, say if you get disabled or terminally ill, you can accelerate it to yourself tax-free. And a lot of people don't know that, but while you're living, a lot of life insurance policies, they have a rider, which gives you the option to accelerate the death benefit while you're still living to pay for things like disabilities, as well as terminal and chronic illness. So that's the basics of long term care. Again, if you're thinking about retirement, go ahead and make sure to check out my retirement planning software and you can find that in the link in the description. If you enjoyed the video, please like and subscribe. I'll talk to you next time. Take care. Hey, real quick before you go, thanks for listening. And please remember to hit follow on your podcast player. You won't miss any episodes and it helps support us bring you the show. Today's show notes and resources are available to you by clicking the link in the description. The opinions and views expressed here are for informational purposes only and is not tax, legal, financial, investment, or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and a potential for a loss of principal. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.
