Strategies for Funding Long-Term Care Insurance

The cost of long-term care can only be described as staggering and potentially devastating. According to Genworth, a leading long-term care insurance provider, the median rate for a semi-private room in a nursing home is $300 a day, or $84,000 a year. You really only have two options to prepare for long-term care expenses – accumulate $200,000 to $400,000 or more of cash reserves or buy long-term care insurance. Otherwise, you will have to rely on the default option to spend down your assets so you can qualify for Medicaid.

Paying for Long-Term Care Protection

Individual Long-Term Care Insurance

Since its introduction four decades ago, long-term care insurance has gone through several iterations largely due to the rapidly evolving state of nursing home care and its escalating costs. Premium costs have increased, making long-term care a major purchase even for younger couples. A typical long-term care policy covering a 55-year-old couple costs about $5,000 annually. The policy pays a maximum daily benefit of $200, linked to a 3% compound inflation rider.

That can be a hefty outlay for a couple trying to maximize their retirement savings. For many people, long-term care insurance should be thought of as one prong of a multipronged strategy to cover long-term care expenses. Efforts to increase savings or reduce lifestyle expenses can form the foundation of the strategy, with long-term care insurance filling in the gaps. This might allow you to purchase a policy with a smaller daily benefit and less inflation protection.

Insure the Younger Spouse

If long-term care coverage is prohibitively expensive for a couple, they can consider alternative strategies. For example, they could consider just insuring the younger or healthier spouse because she will most likely be the caregiver for the older or less healthy spouse and may not have anyone around to provide care for her.

Health Savings Account

A health savings account (HSA) can also be a source of tax-free money to pay for long-term care premiums. The amount you can use tax-free from an HSA depends on your age - $1,560 for ages 50 to 60, $4,160 for ages 60 to 70, and $5,200 for ages 70 and older.

Group Long-Term Coverage

Some employers offer group long-term care insurance coverage. Unlike health insurance coverage, which is typically less expensive when purchased through an employer plan, group long-term care coverage isn’t always cheaper than individual policies. However, if you have any health issues that could increase the cost of individual coverage or prevent you from being able to qualify for it, an employer-sponsored plan is more likely to approve you for coverage.

Alternative Insurance Solutions

Another way to fund long-term care insurance is through hybrid or linked-benefit insurance products. One of the fastest-growing product lines is hybrid life insurance, which gives the policy owner access to a large portion of the death benefit to pay for long-term care services. Any part of the death benefit not used to cover long-term care expenses is available to the beneficiaries upon the policy owner’s death.

Another insurance-based product now being linked to long-term care benefits is deferred annuities with long-term care riders. You invest in an annuity as if you were saving for long-term care expenses, but the annuity will pay out a fixed income at a higher rate, sometimes double or triple the rate if it is needed for long-term care. Both the hybrid life insurance and annuity products counter the concern many people have with long-term care insurance, which is to use it or lose it. These products offer significant benefits even if long-term care is not needed.

Time is Your Most Valuable Asset When Planning for Long-Term Care

There is no getting around the staggering cost of long-term care, but there are ways to mitigate the financial impact it can have. Whether the best solution is to accumulate the extra capital to cover the cost or transfer the risk to an insurance company or some combination of the two, the most valuable asset we have is time. In the context of addressing the cost of long-term care, it is a wasting asset. The less of it you have, the more expensive the solution is going to be. The best use of your time right now is to have a serious discussion about addressing the inevitability of long-term care and finding the best solution to pay for it.