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Ways to cover long-term care costs

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June 25th, 2014

With life expectancies on the rise, most of us will need some form of long-term care at some point. In fact, Arizona wealth manager Keith Klein (tpwm.co) says there is a 55% probability that people 65 years and older will eventually need long-term care.

“Since the current average cost for long-term care is around $6,000 per month, and the average stay is four years, most people cannot afford to fully fund this process via their portfolios,” Klein says.

For many people, purchasing long-term care insurance is the best way to cover those costs. Klein says a 65-year-old purchasing a long-term care policy today could pay as little as $1,200 a year for limited coverage or as much as $10,000 annually for a comprehensive plan—and there are many options in-between.

‘Core four’

Stephen Forman, vice president of Washington-based Long Term Care Associates, Inc. (ltc-associates.com), says to consider the “core four” elements when choosing a policy: the amount it pays per day, the length of time benefits last, the waiting period before benefits kick in, and the level of inflation protection the policy offers.

Nancy Butler, a Connecticut financial planner and long-term care specialist (aboveallelse.org), reminds retirees to consider all of the costs that long-term care insurance doesn’t cover when purchasing a policy. You’ll need savings to pay out of pocket for things like co-insurance on medical expenses, hearing aids and eyeglasses, as well as on personal items such as clothing and gifts. 

She also says to opt for a partnership policy that offers asset protection. After you exhaust benefits, partnership policies allow you to preserve a greater amount of assets and still be eligible for Medicaid. Butler says policies with compound inflation protection are usually more expensive, but benefit amounts increase more quickly, which could be helpful as health care costs rise.

One way to reduce long-term care premiums is to “share” benefits with your spouse. Forman says some policies enable spouses to tap into one another’s benefits. However, he says it’s wise to choose a policy that reserves some benefits for the second spouse to use.

Lately, there’s been a lot of buzz about so-called hybrid policies, which are life insurance policies that include long-term care coverage. People who buy hybrid policies pay a lump sum of say $50,000 to $100,000. Unlike traditional long-term care policies, Forman says that hybrid policies ensure you’ll get money back whether or not you ever need long-term care. He says most people are better off with traditional long-term care insurance, but hybrid policies may be appropriate for people purchasing long-term care insurance in their 70s and 80s, when conventional policies tend to be expensive.

If buying long-term care insurance isn’t affordable for you, Forman says you may have options outside of Medicaid. One alternative is a reverse mortgage, which allows you to use the equity in your home to pay for care. Or, you might consider a life settlement, in which you sell your life insurance policy to a third party.

Whichever option you choose, consult your financial planner about the best way to plan for your long-term care expenses.

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