If you are fortunate, you will retain your physical and mental capacities throughout your life and can always live independently. But there are no guarantees for any of us. If you ever require some form of long-term care, will you be prepared?
So what is the risk of needing long-term care services? According to the Department of Health & Human Services, about 40% of individuals over age 65 receive some form of paid in-home care, with an average care period lasting less than one year. However, about one-third of the population receives care in a nursing home: Of those individuals, about half stay less than one year, 30% stay between one and three years, and 20% stay longer than five years.
And, unfortunately, this care can be expensive. For example, it costs $97,500 per year, on average, for a private room in a nursing home, according to the 2017 Cost of Care Survey produced by Genworth, an insurance company. In some major metropolitan areas, the cost is much higher. Furthermore, Medicare typically pays only a small percentage of these expenses.
So, how do you protect yourself against these potentially catastrophic costs? Essentially, you have four options:
Self-insure
You can try to build enough financial assets to cover the costs of a long-term care event. However, you would need to accumulate an extremely large sum to fully protect yourself, and you'd be diverting assets that could be used to help fund your retirement.
Long-term care insurance
A traditional long-term care (LTC) insurance policy will pay for qualified long-term care costs. The younger you are when you purchase your policy, the lower your annual premiums are likely to be. Keep in mind, though, that a basic LTC policy offers no death benefit or cash value – your premiums are only paying for a nursing home stay, home health care or other type of long-term care service. (Also, even a good LTC policy will include a waiting period before the insurance kicks in and a maximum amount of coverage, such as three years.)
Hybrid/linked benefit insurance
Because of some concerns about paying for insurance but never needing care with traditional long-term care insurance, this type of insurance provides a death benefit plus long-term care coverage. You can accelerate the death benefit to help pay for long-term care costs, and you can also choose to create an additional pool for these costs after the death benefit has been exhausted., But if you don't need long-term care, you still have the life insurance death benefit. Due to the death benefit, your premiums will be higher than those of a traditional long-term care policy.
Life insurance with long-term care/chronic illness rider
By choosing a permanent life insurance policy with this rider, you can accelerate all or part of the death benefit to pay for long-term care costs. (Your death benefit will then be reduced.) This option generally provides more flexibility in paying premiums than a hybrid policy, which may require a larger dollar commitment. Similar to hybrid, you still have the life insurance benefit if you don't need care.
Which option is best for you? There's no one “right” answer for everyone, but a financial professional can help you choose the method that's most appropriate for your situation. And from an economic standpoint – and possibly an emotional one, too – you may be better off by taking action sooner, rather than later.