Evaluating Your Long-Term Care Funding Options

Evaluating Your Long-Term Care Funding Options

February 05, 2024

Assessing the potential impact of long-term costs is one of the biggest challenges among retirees. If you don’t think through how to fund a long-term care plan ahead of time, you could see your income, retirement, and legacy rapidly diminish as your care needs increase.

Many people think that purchasing long-term care insurance offers the best way to protect against these potentially catastrophic costs. But other options may be available.

Self-funding

You may choose to self-fund your long-term care. This means you’ll rely on your own income, personal savings, investments, and assets to cover your long-term care costs.

The advantage of this approach is that you won’t have to pay premiums for long-term care insurance you may never need to use.

However, considering that in states like Massachusetts the monthly median nursing home bill for a semi-private room is roughly $12,623 (according to Genworth’s Cost of Care Survey for 2021), it’s important to consider the potential impact of these expenses on your lifestyle and wealth.

Focus on using income, rather than liquidating assets

Preferably, you’ll have enough income from your investments or other sources to pay for these expenses.

If you don’t have enough monthly income to cover long-term care costs, you might be thinking about liquidating a portion of your wealth to cover these costs. But the timing of these sales could have undesirable consequences. Short or long-term capital gains resulting from the sale of appreciated assets could increase your tax burden.

Plus, removing assets could jeopardize your future income and may require you to drastically change your overall retirement financial plan.

Timing can also be an issue. Trying to sell illiquid assets, such as real estate, during a depressed housing market could lead to a significant loss or take longer than you anticipated. Conversely, selling property at a huge profit could result in undesired tax consequences.

Purchasing long-term insurance

If self-funding poses more risks than you’re willing to take on, you might want to consider insurance options.There are generally long-term care insurance options available.

Traditional long-term care insurance

Once considered the best option, long-term care insurance has lost some of its luster in recent years. Higher-than-expected claims costs have driven many insurers out of the market, and many of those that remain have sharply increased prices for both new and existing clients.

In many cases, lifetime benefits have been replaced by much shorter benefit durations.

Even if you can afford to pay for the highest level of coverage, you may still need to pay for some of these long-lerm care expenses out of pocket.

Life insurance policy with a long-term care rider

This option lets you use some or all of a life insurance policy’s death benefit to help pay for long-term care while you’re still alive. The long-term rider generally does not pay for expenses covered by health insurance or Medicare, such as visits with physicians, prescriptions, or acute care at home or in hospitals and rehab centers.

Long-term riders generally can only be added to universal life insurance or whole life insurance policies.  

Death benefits from these combined policies tend to be more than those from linked-benefit policies.

Linked-benefit products

These products combine the features of long-term care insurance and universal life insurance, making them attractive if you’re concerned about paying premiums for long-term care you may never need.

A linked-benefit policy will provide a maximum long-term care “pool” that may be worth four to five times the cost of the policy, and a death benefit that may be worth a smaller multiple of the policy cost.

So, for example, a $100,000 policy might buy you a lifetime long-term care fund of $540,000 and a death benefit of $180,000. The actual coverage will vary by policy and insurer.

If you end up using your long-term care benefits, the death benefit will be reduced accordingly. But even if you deplete the entire long-term care fund there will be a small residual death benefit. 

Making an informed choice

Ultimately, whether you pay for your own long-term care or purchase long-term care insurance depends on your financial situation, risk tolerance, and how much you’re willing to pay for these costs out of pocket.

These are extremely complex issues, and you’ll want to make them sooner rather than later. That’s why you should meet with your financial advisor to help you evaluate these options. If you decide to purchase long-term care insurance, you may want to ask your advisor for recommendations of insurance agents and perhaps even ask them to attend any meetings you have with the agent.

This material has been provided for general informational purposes only and does not constitute advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult with a financial advisor and/or insurance professional.

 


Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or jspear@canbyfinancial.com

 

This article was co-written by Commonwealth Financial Network® and Canby Financial Advisors.

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