According to LongTermCare.gov, someone turning age 65 today has almost a 70% chance of needing some type of long-term-care services and support in his or her lifetime. What’s more, 20% will need it for longer than five years. There are two basic options for funding that aid: self-insuring, where people pay for the care they need out of their own pocket, and long-term care policies, insurance that can help pay for necessary at-home services or nursing-home care.
Setting money aside to pay out of pocket avoids insurance premiums, which may be a plus if people don’t need a lot of care, or any at all. And even if people need significant long-term care, policies may not provide full coverage due to policy limits and other restrictions. But self-insuring also leaves people open to the possibility that they will need more care than they think—which means dipping into their nest egg or those earmarked for inheritance.
Unfortunately, there is no magic answer. No hypothetical can prepare you for the unknowns the future holds. The amount needed to cover potential long-term-care costs should be based in part on the cost of care today, inflation, life expectancy based on family history and projected returns.
According to Genworth Life’s survey team, the national monthly median cost in 2021 for a home health aide was about $5,100 a month. The national monthly median cost for an assisted-living facility was $4,500, and a semiprivate room in a nursing home was about $8,000 a month. On the other hand, with self-funding, obviously all that expense comes out of the patient’s pocket. There are also other factors that come into play such as how many children they have and the parent’s desire to leave an inheritance. Another consideration is whether parents are philanthropically inclined and want to know they can leave significant money to a favorite charity. Additionally, it makes a difference whether your assets are liquid or illiquid. Your net worth could be $2 million, but your house could be $1,500,000 of it. Before deciding to self-insure, you need to consider if selling the house is what you’d want to do in that situation.
People must also be very cautious of their guesses about how long they will live or the type of care they may need. For instance, people shouldn’t necessarily assume they will die young just because a parent did. On the other hand, assuming you won’t develop a long-term disease such as Alzheimer’s, especially if it runs in your family, could and will have a significant impact on your long-term savings. In addition, there may be other hybrid options and solutions. A hybrid policy combines life insurance with long-term care. The hybrid allows beneficiaries to receive a larger death benefit if long-term-care services aren’t used. People might also consider purchasing a smaller long-term-care policy and self-insure a portion of their expected costs.
All this to say that none of this is a perfect science. Which route you choose depends on many factors such as your finances, asset mix, policy costs, life expectancy, health history and most importantly risk tolerance. It is a tradeoff that comes down to personal comfort and preference. For many people, the question of needing some type of long-term care isn’t if, but when. How to pay for that care is another question altogether.
- Allen Minassian
1. https://www.nia.nih.gov/health/what-long-term-care