Whether you are retiring soon or already retired, you’ll face many decisions on how to build your retirement budget. Insurance can become a double-edged sword during this decision-making process. The insurance premiums you pay on your home, vehicles, boat, life insurance, etc. directly decrease the amount of money available to spend on the fun parts of retirement like recreation and leisure. After preparing for retirement for decades, the potential for a catastrophic long term care event could be right around the corner. Creating an appropriate insurance plan is quintessential to a successful retirement.
What is long-term care?
Long-term care, also known as custodial care, is a range of services and support for your personal care needs. This is not to be confused with medical care – which is the exact opposite. Long term care helps with basic life tasks that are broken down into Activities of Daily Livings (ADLs).
- Feeding – preparing meals and feeding oneself
- Bathing – being able to stay clean
- Dressing – difficulty dressing, mismatched clothing, inappropriate attire (PJs to family dinner)
- Continence – control over bowel and bladder
- Transferring – getting in/out bed or chair without assistance
- Toileting – using the restroom without assistance
At the time your health or mental capacity has declined and requires assistance, you and your family will be faced with decisions on your care (i.e. spousal, family member, assisted living, nursing home, memory care, etc.).
How much will Medicare cover?
A common misconception is that Medicare will help with your long-term care costs. The reality is Medicare will contribute $0 for your custodial care needs. It’s a frightening misconception!
There are, however, a few notable items that fall into a Medicare-paid category with specific requirements:
Rehabilitation care – generally needed after a surgery or medical procedure, Medicare Part A will pay for inpatient rehabilitation. Out-of-pocket deductibles are paid from day 1-91.
Hospice care – if you are terminally ill and have a life expectancy of 6 months or less Medicare will cover 100% of your bed costs. Any drugs administered have a small copayment.
I need care – what happens?
At the point you are not able to perform two of the six ADLs on your own, you and your family will be faced with difficult decisions regarding who will provide, cost of care, and ongoing financial support for the healthy spouse.
The most common types of custodial care are spousal care, family care, in-home care, assisted living, and nursing home.
To help financially frame up these options, the current nationwide average for a private nursing room bed is $290 daily or $105,850 annualized. In my home state of Minnesota, the cost is much higher than the national average at $400 daily or $146,000 annualized. Furthermore, residents of Minnesota are required to pay out of pocket for any custodial care expenses incurred until their asset level decreases to Medical Assistance limits. For 2021, a spouse will be able to maintain their residence up to $603,000 in equity, a primary vehicle, and $130,380 in joint assets. The income limits from pensions and Social Security will vary. * It is important to familiarize yourself with the potential cost you could incur based on your state guidelines.
Do you already have long term care insurance? Fantastic! Benefits will start paying based on the agreement in your insurance contract
In any long-term care event, the expenses are not nominal and if incurred can leave your spouse with little to no money to maintain necessary retirement income. The best way to prevent a retirement plan failure is to create a plan.
Be proactive - Create a plan!
Being proactive and creating a long-term care plan is essential to a successful retirement. It is a very personal decision that is based on your values and priorities. It is important to understand the pros/cons to your plan and ensure it fits your retirement income needs. Keep in mind you may not elect to insure 100% of potential long term care costs as they are potential. There is not a one-size fits-all approach, which is why I typically break down the options into the following 3 categories.
Self-insuring
Self-insurers are playing the odds that care will not be needed. With this option, you take on 100% of the risk. This is the least expensive plan from a premium perspective but has high risk and can be the most expensive should long-term care be required. In the best case, you stay healthy and need $0 of custodial care. In the worst case, assets are spent down to Medical Assistance levels and no funds are left for spousal income or inheritance to your children.
Traditional Long Term Care Insurance
Until a few years ago, this was the only option available for insurance against long-term care expenses. With this type of insurance, you transfer most of the financial risk of needing long-term care to an insurance company. These polices are generally robust in nature and will require good health to obtain. This type of policy is “use it or lose it”. Premiums could be costly and can continue to increase substantially each year.
Hybrid Life Insurance or Annuity Policy
Self-insurance and traditional long-term care insurance, as discussed above, cover the extremes of the spectrum. Is there a happy medium between the two? The insurance industry recognized the significant extremes and developed a “best of both worlds” scenario. A hybrid arrangement allows you purchase either a life insurance policy or annuity with a long-term care rider. The rider is what provides an indemnity or reimbursement when long-term expenses occur.
If you are currently self-insuring, for example, imagine taking the amount of money you’ve put aside for long term care costs and repurposing it toward a more flexible option. Should you need long-term care, you and/or your spouse can elect to receive unlimited lifetime benefits – yes, unlimited (based on your specific structure of the policy)! Because there is no cap, these benefits are more valuable than the alternative of a flat dollar benefit. Alternatively, if you do not end up requiring long-term care a hybrid policy offers a death benefit passing onto your beneficiaries. In either case, there is value with a hybrid policy.
Now what? – Take Action!
Nothing great is ever accomplished without action. If you haven’t created your long-term care plan or need to update your plan, I encourage you to seek a professional opinion and take action. SRP WELLth is here to help you prioritize your needs, values, and priorities to help you pursue long term WELLth success.
*Additional details on MN asset spend down requirements: https://www.medicaidplanningassistance.org/medicaid-eligibility-minnesota/
This article is intended to assist in educating you about insurance generally and not to provide personal service. State insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional.
Meet the Author:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Wealth management (i.e. WELLth) services are provided separately from retirement plan consulting services you may receive from SRP as a result of participation in your employer's retirement plan. They may involve an advisory agreement and/or an additional fee.