Many people want to protect their children’s inheritance. Most people do not want to be a burden on their family. Nobody wants poor care in their final years. Long-term care (LTC) insurance can help with these concerns, but does the cost outweigh the benefit?
LTC insurance is designed to help cover the cost of care for individuals who require extended or long-term care due to chronic illness, disabilities, or the effects of aging. Unlike traditional health insurance, LTC insurance focuses on personal and custodial care rather than medical treatment.
Long-term care involves assistance with daily living activities—such as bathing, eating, dressing, or managing cognitive impairment like dementia. The probability of needing such care is not trivial. Research indicates approximately 70 percent of adults who reach age 65 will develop severe long-term support needs during their lifetime, and nearly half will require some type of paid care services.
Financial implications of long-term care
Long-term care expenses can significantly impact retirement savings. According to the 2024 Genworth Cost of Care Survey, the median annual cost for nursing home care in Massachusetts ranges between $173,375 (semi-private room) and $186,515 (private room). Assisted living communities average around $108,696 annually, while home health aide services average $86,944 per year.
Given these substantial costs, it is understandable why many retirees worry about the potential impact on their finances and their children’s inheritance.
Whether or not LTC insurance is prudent is far too complex to decide in a general way and should be decided upon for each individual or household. And while there are some rules of thumb to help with the decision, a good thought exercise is to consider a hypothetical family: As Bob and Anne, a recently retired couple living in Lenox, consider their options, the decision involves balancing peace of mind against financial commitment and potential risks. Let’s explore this topic carefully, using their circumstances to provide clarity.
The case for long-term care insurance: Pros
- Asset Protection: LTC insurance helps protect Bob and Anne’s sizable retirement portfolio and their home, valued at $1 million. By covering some or all of the costs, it prevents significant depletion of their savings, preserving their children’s inheritance.
- Peace of Mind: Knowing they have coverage can ease the anxiety about unforeseen healthcare expenses, allowing them to enjoy their retirement more fully without the persistent worry of “what if?”
- Reduced Family Burden: Since Bob and Anne want to spare their children the responsibility and financial burden of caregiving, insurance significantly reduces the likelihood that their adult children would have to manage these difficult tasks and associated costs.
- Flexibility in Care Options: Policies often allow for choices in types of care settings, including at-home care or assisted living, allowing Bob and Anne to choose a lifestyle that fits their preferences.
The case against long-term care insurance: Cons
- High Premium Costs: LTC insurance can be expensive, and premiums often increase substantially over time. Even though Bob and Anne are currently healthy, they may pay high annual premiums that might rise further.
- Potentially Unused Benefits: There is always the possibility that neither Bob nor Anne will need significant long-term care, resulting in a scenario where they pay hefty premiums for a benefit never utilized.
- Complex and Limited Policies: Policies often include limitations, exclusions, and conditions that can complicate claim processes and may not cover all types of care or full costs.
Given Bob and Anne’s assets, their clear goal of protecting their children’s inheritance, and their desire to avoid placing caregiving burdens on their adult children, LTC insurance (or a life insurance hybrid) merits serious consideration. With $2.5 million in assets, they fit within the optimal financial profile to benefit from LTC insurance’s asset protection.
While premiums will be considerable, their assets suggest they can manage these costs without significantly compromising their retirement lifestyle. If traditional LTC insurance feels daunting, exploring a hybrid policy could strike a better balance between their desire for security and practicality.
Alternative: Life insurance with a long-term care rider
An alternative solution to traditional LTC insurance is life insurance with a long-term care rider. This hybrid product ensures that benefits will be used, either for long-term care expenses or as a death benefit passed on to heirs.
Pros:
- Dual-purpose policy ensures value regardless of whether long-term care is needed.
- Premium stability compared to traditional LTC policies.
Cons:
- Typically requires a lump-sum or higher ongoing premium.
- May offer lower LTC benefit amounts than standalone LTC insurance policies.
Rules of thumb for considering long-term care insurance
- Asset Threshold: Generally, households with assets between $1 million and $5 million often benefit most from LTC insurance, making Bob and Anne ideal candidates.
- Income Considerations: Premiums should ideally be affordable without causing financial strain. Bob and Anne should feel comfortable that premiums will not significantly impact their lifestyle.
- Personal Preferences: Couples determined not to burden their children or risk their inheritance can benefit from LTC insurance.
- Health and Family History: While Bob and Anne currently have no hereditary risks or health anomalies, they must acknowledge that healthy individuals typically face longer durations of care, potentially increasing the benefit of LTC coverage.
Ultimately, deciding on LTC insurance should reflect your personal financial situation, personal values, and risk tolerance. The advantages of peace of mind, asset preservation, and family protection must be weighed carefully against premium costs and policy complexities.
Consulting with a financial advisor who specializes in retirement planning and long-term care options can further tailor the right strategy to their unique circumstances, ensuring their retirement is both secure and enjoyable.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
