Long-term care insurance is an important consideration heading into retirement

Long-term care insurance is a type of insurance policy designed to cover the costs associated with extended care needs, such as assistance with activities of daily living (ADLs) or supervision due to cognitive impairment. This care can be provided in various settings, including nursing homes, assisted living facilities or even in the policyholder's own home.

The importance of long-term care insurance cannot be overstated, especially for couples approaching retirement age. According to the U.S. Department of Health and Human Services, about 70% of people turning 65 can expect to use some form of long-term care during their lives. With the average annual cost of a private room in a nursing home exceeding $100,000, the financial burden of long-term care can quickly deplete retirement savings and leave couples in a precarious financial situation.

Long-term care insurance helps protect against this risk by providing a dedicated source of funds to cover these expenses. This can help preserve assets, maintain financial independence and ensure that one spouse's care needs don't compromise the other's financial security.

Understanding the potential costs of long-term care is crucial when considering whether to purchase long-term care insurance. The costs can vary significantly depending on the type of care needed, the duration of care and the geographic location. Here are some national average costs for different types of long-term care services, according to Genworth's 2023 Cost of Care Survey :

• Nursing home care: semi-private room, $104,000 per year; private room: $116,800 per year.
• Assisted living facility: $64,200 per year.
• Home health aide services: $75,500 per year.

It's important to note that these are national averages, and costs can be significantly higher in certain regions, particularly in urban areas or states with a higher cost of living. For example, in states like California, New York or Massachusetts, the annual cost of a private room in a nursing home can easily exceed $150,000.

Moreover, these costs have been steadily increasing over time. The cost of nursing home care is expected to increase by about 3% annually over the next five years. This means that by the time a couple in their early 60s might need long-term care, the costs could be substantially higher than they are today.

One of the most common misconceptions about long-term care is that Medicare will cover these expenses. In reality, Medicare's coverage of long-term care services is quite limited:

Medicare coverage

Medicare does not cover custodial care, which includes assistance with activities of daily living like bathing, dressing and eating.

It does cover short-term skilled nursing care, but only under specific conditions:

• The care must follow a qualifying hospital stay of at least three days.
• Coverage is limited to 100 days per benefit period.
• Full coverage only applies for the first 20 days; for days 21-100, there's a significant daily copayment.
• Medicare does not cover long-term stays in nursing homes or assisted living facilities.

Medicaid coverage

Medicaid, on the other hand, does cover long-term care services, but only for individuals who meet strict income and asset requirements:

• Medicaid is a means-tested program, meaning you must have limited income and assets to qualify.
• In most states, an individual must have less than $2,000 in countable assets to be eligible for Medicaid long-term care coverage.
• For married couples, there are special rules that allow the spouse not receiving care (the "community spouse") to keep a certain amount of assets and income.
• Medicaid coverage typically includes nursing home care and, in many states, home and community-based services.

It's important to note that relying on Medicaid for long-term care often means spending down assets to meet eligibility requirements, which can significantly impact a couple's financial security and legacy planning.

Couples approaching retirement face a number of economic challenges that make planning for long-term care even more crucial:

• Increasing life expectancy. While living longer is generally positive, it also means retirement savings need to last longer. The Society of Actuaries reports that for a couple age 65, there's a 50% chance that at least one spouse will live to age 92.
• Rising health care costs. Health care inflation has consistently outpaced general inflation. Fidelity estimates that an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.
• Inadequate savings. Many Americans are underprepared for retirement. According to the most recent Federal Reserve Survey of Consumer Finances, the median retirement account balance for Americans age 55-64 was $185,000.
• Social Security concerns. While Social Security provides a foundation for retirement income, its future is uncertain. The Social Security Board of Trustees projects that the program's trust funds will be depleted by 2035, potentially leading to reduced benefits.
• Low interest rates. Times of low interest rates make it challenging for retirees to generate income from savings without taking on additional risk.
• Inflation risk. Even moderate inflation can significantly erode purchasing power over a 20- to 30-year retirement period.

These economic challenges underscore the importance of comprehensive retirement planning, including consideration of long-term care needs. Long-term care insurance can help mitigate some of these risks by providing a dedicated source of funds for care needs, potentially preserving other retirement assets.

Qualifying for long-term care insurance becomes more challenging as individuals age or develop health issues. This is why it's often recommended to consider purchasing a policy in your 50s or early 60s. Here are some key factors that affect qualification:

• Age. Premiums increase with age, and it becomes more difficult to qualify for coverage as you get older. Many insurers have maximum age limits for new policies, often around age 75.
• Health status. Insurers typically require a health screening before issuing a policy. Pre-existing conditions can lead to higher premiums or outright denial of coverage. Some health conditions that might disqualify an applicant include Alzheimer's disease or dementia; Parkinson's disease; Multiple sclerosis; AIDS or HIV; current need for long-term care services.
• Family health history. Some insurers may consider family health history, particularly for conditions like Alzheimer's disease.
• Lifestyle factors. Smoking, excessive alcohol consumption or dangerous hobbies may affect qualification or premium rates.
• Occupation. Some high-risk occupations may lead to higher premiums or difficulty qualifying.
• Couples discount. Many insurers offer discounts for couples who apply together, which can make qualification easier and reduce premiums.

It's important to note that each insurer has its own underwriting guidelines, so being denied by one company doesn't necessarily mean you can't get coverage elsewhere. Working with an experienced insurance agent who specializes in long-term care insurance can help navigate these qualification issues.

The lack of widespread long-term care insurance coverage has significant implications for our rapidly aging society:

Without insurance, the burden of care often falls on family members. The National Alliance for Caregiving and AARP report that about 53 million Americans provide unpaid care to an adult or child. This can lead to lost wages, reduced retirement savings and increased stress for caregivers.

As more people rely on Medicaid for long-term care, it puts increasing pressure on state and federal budgets. The Medicaid and CHIP Payment and Access Commission reports that Medicaid accounted for 52% of national spending on long-term services and supports in 2018.

Meanwhile, those without insurance or sufficient assets may not be able to afford high-quality care, potentially leading to poorer health outcomes and reduced quality of life.

Then there is the eonomic impact to consider. The cost of unpaid caregiving and early retirement due to caregiving responsibilities can have a significant impact on the broader economy. The AARP Public Policy Institute estimates the economic value of unpaid family caregiving at $470 billion annually.

Another impact involves the housing market. The inability to afford proper care can lead to premature home sales, potentially affecting local housing markets.

Also, without proper long-term care, more seniors may end up in hospitals for issues that could have been managed in a long-term care setting, putting additional strain on the health care system.

For couples approaching age 60, the decision to purchase long-term care insurance is a complex one that requires careful consideration of many factors. The potential costs of long-term care, limitations of Medicare coverage, economic challenges facing retirees and qualification issues all play a role in this decision.

While long-term care insurance can provide valuable protection against the potentially devastating costs of extended care needs, it's not the right choice for everyone. Some couples may have sufficient assets to self-insure, while others may not be able to afford the premiums or qualify for coverage.

Regardless of the decision, it's crucial for couples to have a plan for potential long-term care needs. This might involve purchasing insurance, setting aside dedicated savings, exploring hybrid life insurance/long-term care products or planning for Medicaid eligibility.

The broader societal implications of inadequate long-term care coverage highlight the need for policy solutions to address this growing challenge. As our population ages, finding ways to provide and pay for quality long-term care will become an increasingly urgent priority.

Ultimately, the key is to start planning early, consider all option and make an informed decision based on your unique financial situation, health status and risk tolerance. Consulting with a financial professional can help navigate this complex decision and ensure that you're well-prepared for whatever the future may bring.