A study from the Department of Health and Human Services (HHS) indicates that approximately 49 percent of men and 64 percent of women who turn 65 today will require substantial long-term care at some point during their later years. Supplementing this information, the National Association of Insurance Commissioners (NAIC) reported that in 2022, traditional long-term care (LTC) policies provided coverage for around 6.1 million Americans. Additionally, according to the American Association for Long-Term Care Insurance, a noteworthy 78% of individuals purchasing personal LTC insurance fall within the age bracket of 50 to 69 years.
Traditional Medicare, the government-funded health insurance specifically for individuals aged 65 and older as well as certain younger disabled individuals, generally excludes coverage for long-term care. Its scope is limited to providing some skilled care during the immediate recovery period following hospitalization for an injury or illness. On the other hand, some Medicare Advantage plans, administered by private insurance companies, extend limited additional benefits. These can include services such as meal delivery and transportation to medical appointments. Additionally, veterans have the option to receive long-term care services through the U.S. Department of Veterans Affairs.
An option to finance long-term care services is through long-term care (LTC) insurance. It is often recommended to invest in LTC insurance during your 40s or 50s. At this stage of life, policies tend to be more affordable, and you can secure coverage before potential health issues might render you ineligible. Nevertheless, in recent years, the cost of these policies has risen significantly for both new buyers and existing policyholders. Simultaneously, the choices available have evolved, making it challenging for the average middle-class individual to save enough to shoulder these expenses for more than a couple of years, if at all. For instance, data from the American Association for Long-Term Care Insurance (AALTCI) indicates that in 2023, the average annual premiums for a $165,000 long-term care policy are seen in the below table:
| Level Benefits | 3% Inflation protection | 5% Inflation protection | |
| Single Male, Age 55 | $900 | $2,100 | $3,500 |
| Single Female, Age 55 | $1,500 | $3,600 | $6,200 |
| Couple Both Age 55 | $2,080 combined | $5,025 combined | $8,575 combined |
Projected annual costs of the policyholder aged 80 years (in 2048)
| Semi-private room at a skilled nursing facility | Home Health Aide |
| $133,740/year | $134,136/year |
Source: https://www.genworth.com
This implies that a $165,000 policy acquired at age 55 in 2023 will scarcely cover 14 months of care if the policyholder needs assistance at the age of 80.
Long-term care insurance often comes with a hefty price tag, and even if you have the financial means, health issues might render you uninsurable. However, here are a few alternative strategies to help you cover your long-term care expenses.
Savings /Retirement Plan
If your workplace offers a retirement plan such as a 401(k) or 403(b), check to see if they provide matching contributions. If they do, aim to contribute enough to take full advantage of the employer match, as it’s essentially free money towards your retirement. On the other hand, if your employer does not offer such a plan, consider establishing an Individual Retirement Account (IRA) to benefit from tax-deferred savings. You can open an IRA with most major banks and financial institutions. Even though you don’t need to formally set aside funds, they can be part of your Health Savings Account (HSA), IRA, 401(k), or brokerage investments. However, for accurate financial planning, especially when calculating your safe spending amount or assessing your retirement savings progress, exclude these amounts from your calculations. This ensures a clear picture of your actual spending capacity and retirement readiness.
Group long-term care insurance
Securing long-term care insurance through an employer is often the most advantageous option, particularly for individuals with health concerns that could render them ineligible for individual coverage or subject to higher-than-standard health rates. Conversely, if you’re in relatively good health or married (or living with a partner), employer-offered insurance might end up being pricier than equivalent individual plans available in the marketplace. Nowadays, true group insurers rarely provide long-term care policies, and some have even ceased accepting new applications from existing groups. However, if you are fortunate enough to land a job that includes long-term care insurance as a benefit, you can enroll without any scrutiny of your health history.
Hybrid life insurance with long-term care policy.
Hybrid policies typically combine life insurance coverage with in-built long-term care benefits, presenting a versatile option for policyholders. Additionally, many insurance companies provide the option to add long-term care insurance riders to their existing life insurance plans, offering further customization to meet individual needs. These policies cater to a common apprehension many individuals have: the fear of paying premiums for years without ever needing the benefits. The key advantage of hybrid policies is that they ensure you receive a benefit, no matter what. However, this assurance comes at a higher price. Consequently, hybrid policies tend to be more costly compared to traditional ones.
Should long-term care become necessary, a portion of this benefit can be utilized to cover care expenses, resulting in a decreased amount for your beneficiaries. Conversely, if the long-term care component remains untouched, your family will receive the entire death benefit.
To qualify for long-term care financing through a hybrid policy or an LTC rider, you must receive a diagnosis of a chronic illness from a certified health provider. Individuals may be classified as chronically ill if they experience significant cognitive decline or are unable to perform daily living activities—such as bathing, toileting, dressing, and eating—without requiring assistance.
Health Savings accounts (HSAs)
Health savings accounts (HSAs) offer a way to save pre-tax money for qualified medical expenses and allow you to earn interest on your contributions. An HSA can be leveraged to offset a portion of the expenses associated with a long-term care insurance policy, as long as the policy meets the criteria for being tax-qualified. For a policy to be considered tax-qualified, it must adhere to the stipulations outlined in IRC 7702(B). This entails that the policy guarantees renewability, restricts its payouts exclusively to long-term care expenses, and does not possess any cash value. Additionally, HSAs can be utilized to finance approved long-term care services, encompassing nursing services offered either at home or within a care facility.
To be eligible for a Health Savings Account (HSA), you need to be covered by a high-deductible health insurance plan, including those available through the Marketplace. You have the option to set up an HSA at a bank or credit union. Additionally, if your high-deductible insurance plan is provided by your employer, they may also offer the opportunity to open an HSA through the workplace.
Long-term Care Annuity.
Another option to consider instead of standalone long-term care insurance policies is annuities. These financial products offer a reliable stream of income throughout your retirement years, requiring an initial lump sum payment. When you invest in an annuity, you make a one-time payment, which then entitles you to receive a predetermined amount of income at regular intervals for the duration of your life.
A long-term care annuity operates as a deferred annuity enhanced with a specific long-term care rider. This rider acts as an additional feature you can opt for at the time of purchasing the annuity, providing you with extra benefits tailored to meet long-term care needs.
There are additional avenues to consider, such as accessing funds through a home equity line of credit or a reverse mortgage. However, before committing to self-funding, it’s crucial to evaluate each option thoroughly and understand their potential impacts. Engaging in a detailed conversation with your financial advisor about these choices is a wise step to ensure you make an informed decision.