Devising a strategy for financing long-term care: Insurance options and alternatives

• Experts advise that understanding the benefits you may qualify for is crucial when planning for long-term care.
• Typically, long-term care insurance covers expenses for individuals with chronic illnesses, dementia, or severe cognitive decline, as well as those who are unable to perform at least two out of six "activities of daily living" without assistance.
• The cost of premiums for a 55-year-old woman with healthy benefits can vary between $1,500 and $7,000 annually.

Many families are concerned about how to cover the cost of long-term care, which a report by the Urban Institute and the Department of Health and Human Services states that almost three-quarters or 70% of people turning 65 will require in their lifetime.

Stacey Hachenberg and her partner, Sharon Fleming, have been taking care of their parents for several years. Hachenberg's father passed away in April after staying at an assisted living facility for two years. The cost of his care was covered by his savings, pension, and veterans benefits.

Despite the facility's assistance in navigating the Veterans Affairs application process, it still took approximately a year to obtain the benefits, according to Hachenberg.

If my father had not saved a small amount of money, we would have faced difficulties, she stated.

Finding benefits to pay for care

Planning for long-term care involves understanding the benefits you may qualify for, determining where you want to receive care, selecting your caregiver, and figuring out how to pay for it, according to certified financial planner Marguerita Cheng, CEO and founder of Blue Ocean Global Wealth in Gaithersburg, Maryland.

According to Cheng, a member of the CNBC Financial Advisor Council, long-term care insurance can be beneficial because it enables you to transfer some of the risk.

Long-term care insurance typically covers care for individuals with chronic illnesses, dementia, or severe cognitive decline, as well as those who are unable to perform at least two out of six "activities of daily living" without assistance, including bathing, managing incontinence, dressing, eating, getting on or off the toilet, or getting in or out of a bed or chair.

Fleming stated that her mother, Toni Arfa, has Alzheimer's disease and is currently residing in an assisted living facility that costs approximately $8,000 per month. According to Fleming, her mother does not require skilled nursing but rather a safe environment.

Fleming stated that Arfa is not eligible for veterans benefits and did not purchase long-term care insurance, so her savings are covering the cost. She estimates that her mother can pay for approximately two more years of care before running out of money.

If we don't assist her, she'll need to seek help at another facility, my sister stated.

Experts suggest that most Americans pay for long-term care by depleting their savings and assets, while Medicaid covers long-term care for those with minimal assets and income.

LTC policy costs are like 'a car payment, without the car'

Fleming and Hachenberg are now considering purchasing long-term care insurance for themselves. They want to avoid becoming a financial burden on their adult children, but the high cost of insurance is a challenge. "It's like having a car payment, without the car," said Fleming.

According to Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center and an expert on long-term care issues for the Urban Institute's Program on Retirement Policy, the issue with long-term care insurance is that many companies mispriced these policies in the past, resulting in financial losses. As a result, the coverage is not as generous as it once was, and the rates are now higher.

Insurers are concerned about "tail risk," which refers to individuals requiring long-term care, as it is costly, according to Gleckman.

It's costly for consumers too.

The cost of long-term care insurance for a 55-year-old woman with good health can range from $1,500 to $7,000 annually, according to the American Association for Long-Term Care Insurance. On average, the cost is approximately $3,700 per year for a policy that provides a 3% annual growth rate and will result in a benefit of approximately $400,000 at the age of 85.

As people age, both men and women face higher premium costs and decreased eligibility, despite men typically having lower premiums due to their shorter lifespans and lower likelihood of utilizing benefits.

Based on AALTCI figures, a 60-year-old woman would pay $4,400 in annual premiums for a benefit that grows at 3% yearly and would yield approximately $345,500 at age 85.

Long-term care insurance is a wise investment for both of us and our children, according to Hachenberg.

Alexa, Fleming's daughter, is a financial advisor and is assisting them in evaluating their alternatives.

"Alexa Fleming emphasized the importance of feeling comfortable, safe, accepted, and supported in the facility one is moving into. She stated that if one cannot afford to have a positive experience, it will not be a fulfilling end-of-life journey."

When looking for long-term care insurance, two crucial factors to take into account, according to Cheng, are:

1. Does the policy cover at-home care?
2. Does the daily benefit increase with inflation protection?

Cheng advised that you prioritize thorough home care, even if it means sacrificing a lower benefit, to avoid cutting corners on inflation.

Few people have long-term care insurance

According to LIMRA, only about 3% to 4% of Americans have long-term care insurance. Many companies have stopped selling stand-alone long-term care policies due to increased risk and rising premium prices on older inflation-adjusted policies.

"According to Gleckman, this is a classic example of market failure: people are unwilling to purchase it, and insurance companies are reluctant to offer it."

Long-term care benefits can be obtained through hybrid policies, such as life insurance or annuities, which are alternatives to traditional, standalone long-term care insurance.

You can increase your savings in a tax-advantaged health savings account or high-yield savings account to cover healthcare expenses as needed.

"If traditional long-term care policies don't appeal to you, don't settle for them," Cheng advised. "It's crucial to take a customized approach, regardless of your choice."

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