Long Term Care Planning: A Holistic Financial Plan Essential

November is long term care awareness month. As a physical therapist and RICP® financial planner focused on helping people live with dignity, it has been my passion to educate people about why long term care planning is essential to any financial plan, especially one that is holistic.

What is long term care?

The World Health Organization (WHO) defines long term care as follows: Long-term care includes a broad range of personal, social, and medical services and support that ensure people with, or at risk of, a significant loss of intrinsic capacity (due to mental or physical illness and disability) can maintain a level of functional ability consistent with their basic rights and human dignity.

Inflation and long term care

In the US, the cost of long term care has been steadily increasing, at a rate that has surpassed inflation up until recently.

The average inflation rate for the past 10 years is 2.65%.

The U.S. inflation rate for 2023 is 3.7%. It was 8.00% in 2022 and 4.70% in 2021.

In contrast, long term care costs in facilities have typically increased an average of 3%-5% on an annual basis.

How much does Long Term Care cost?

The average cost for a nursing home in 2023 is approximately $108,000 per year. Generally, people tend to need care for an average length of time of 44 months, thus an average long term care expense might amount to nearly $350,000 out-of-pocket should care be needed today.

The Centers for Medicare & Medicaid Services’ Office of the Actuary predicted a 5% increase in spending on nursing home and CCRC care for 2023, and a 5.2% spending increase in 2024.

If costs increase as projected, a 60-year-old today will expect to pay approximately $800,000-$1,200,000/year 25 years from now when a claim is most likely to be made.

With simply needing care for an “average” length of time–3 to 4 years, a $1,000,000 nest egg will easily be eroded.

How to pay for long term care

People pay for care using their Long Term Care policies, riders on life policies, or retirement savings.

Long term care insurance

In the expensive future, using insurance to buy your way into the best care may be an appealing tradeoff against Medicaid-funding nursing homes.

According to Terry Savage, finance expert, “a 63-year-old woman could lock in $5,000 per month of coverage for 6 years of care, along with a 3% compound inflation adjustment – plus a $120,000 death benefit.

The cost is a steep one-time payment of $99,000 or $12,600 annually if paid over 10 years. Or $10,500 if paid over 15 years.

Where would anyone get that money just to cover the possible need of long term custodial care, which is not covered by Medicare or supplements?”

Alternative Solutions: Life insurance/Long Term care hybrid and Annuity Policies

Many people are exchanging cash value life insurance policies to buy combo life/long term care policies. Others are using an annuity to convert IRA money to an annuity that will pay these annual payments.

Here are some things to consider when buying one:

Consider buying higher benefit amounts or inflation riders. For extra cost, inflation riders provide increases in benefits from the initial benefit amount. You can more easily reduce benefits if things change in the future than add additional benefits, which would be priced at higher attained age rates and subject to medical underwriting.
Policyholders who received in-force premium increases should consider paying the full premium increase. Many carriers offer policyholders the chance to reduce benefits or inflation riders in exchange for a lower premium increase. It’s probably advisable in most cases to pay the increased premium cost if it won’t cause too much financial pain.
For those who can’t buy more coverage set aside more retirement savings in safe money investments such as annuities to pay for care.

Financial Planning With Heart: A Holistic Approach

Planning for long term care should not only consider the cost, but more importantly, your preferences in the types of care you want to receive and where you wish to receive them. Working with a professional who understands the complexity of this process, with both health care and financial knowledge, can make a world of difference.

Let us help you navigate this complex financial and very emotional decision.

At Live With Dignity, we don’t just focus on numbers. We focus on YOU, and care about your total well-being. We are committed to helping you achieve your financial goals while considering your emotional and personal needs throughout your financial journey.