Making a plan to pay for long-term care: Insurance and alternatives

Almost three-quarters — 70% — of people turning 65 will need long-term care in their lifetime, according to a report by the Urban Institute and the Department of Health and Human Services. How to pay for that care is worrisome for many families. 

Stacey Hachenberg, 58, and her partner, Sharon Fleming, 53, have been caring for their parents for several years. Hachenberg’s father died in April after staying at an assisted living facility for two years. While she coordinated his care, the cost was covered by his savings, pension and veterans benefits. 

“It took about a year to actually get those benefits,” Hachenberg said, even with the facility’s help navigating the Veterans Affairs application process.

“Had we not had a tiny little bit of money in my father’s savings, we would have been in trouble,” she said.

Understanding what benefits you have or may qualify for is a critical part of planning for long-term care, financial advisors say. Figuring out where you want to receive long-term care, who will be your caregiver and how you’ll pay for the care should all be part of the planning process, said certified financial planner Marguerita Cheng, CEO and founder of Blue Ocean Global Wealth in Gaithersburg, Maryland. 

“Long-term care insurance can be helpful because it allows you to transfer some of the risk,” said Cheng, who is a member of the CNBC Financial Advisor Council.

Long-term care insurance typically pays for care if you have a chronic illness, have dementia or a severe cognitive decline, or can’t do at least two out of six “activities of daily living” without assistance: bathing, dealing with incontinence, dressing, eating, getting on or off the toilet or getting in or out of a bed or chair. 

Fleming said her mother, Toni Arfa, has Alzheimer’s disease and is now in an assisted living facility that costs about $8,000 a month. “She doesn’t need skilled nursing. She just needs to be safe,” Fleming said. 

Arfa is not eligible for veterans benefits and never purchased long-term care insurance, so her savings are covering the cost, Fleming said. She figures her mother can pay for about another two years of care before the money runs out.

“Then my brother and I will have to help, or she’ll have to go to another facility,” she said. 

Most Americans wind up paying for long-term care by depleting savings and other assets, experts say. Medicaid will pay for long-term care, but it only kicks in for people with few assets and limited income.

Fleming and Hachenberg are now considering buying long-term care coverage for themselves. They don’t want to become a burden on their adult children, they said, but affording the high cost of insurance is challenging. “It’s like having a car payment, without the car,” said Fleming. 

Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center who also works on long-term care issues for the Urban Institute’s Program on Retirement Policy, said the problem is many companies mispriced these insurance policies years ago and lost money on them — so the long-term care coverage isn’t as generous now and rates are higher.

Insurers are “very afraid of what they call the tail risk, which is people who need care for a very long period of time,” Gleckman said. “It’s really expensive for them.” 

It’s costly for consumers too.

Premiums for a healthy 55-year-old woman can range from $1,500 to $7,000 a year, depending on the benefits, according to the American Association for Long-Term Care Insurance. If she’s healthy at that age, the cost averages about $3,700 a year for a benefit that grows at 3% yearly and would yield a benefit of about $400,000 at age 85.

Premiums are generally lower for men, since they don’t live as long and are less likely to use the benefits. For both men and women, as they age, premium costs rise and it gets harder to qualify. 

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

“We’re both really aware that long-term care insurance would be a very smart investment right now. Not just for us, but for our kids,” Hachenberg said.

Fleming’s daughter, Alexa, is a financial advisor and is helping them review their options.

“It’s important to be comfortable with the facility that you’re going to be moving in, and feeling safe and feeling accepted and feeling supported,” said Alexa Fleming. “If you don’t have the funds to be able to do that, it’s not going to be a great end-of-life experience for you.”

Cheng said there are two important considerations to make when shopping around for long-term care insurance:

1. Does the policy cover at-home care?
2. Is there “inflation protection,” meaning does the daily benefit increase as the cost of living rises? 

“You want to make sure that you don’t cut corners on home care, or inflation, even if it means you have to get a lower benefit” to cover the cost of care, Cheng said.

Only an estimated 3% to 4% of Americans have long-term care insurance, according to LIMRA, a life insurance industry research group. Many companies have stopped selling stand-alone long-term care policies as their risk increased and many consumers saw spikes in premium prices on older inflation-adjusted policies. 

“It’s a classic market failure,” Gleckman said. “People don’t want to buy it, and insurance companies don’t want to sell it.” 

Hybrid policies, such as life insurance or annuities with long-term care benefits, are alternatives to a traditional, standalone long-term care insurance.

You can also boost your savings in a tax-advantaged health savings account or high-yield savings account to pay for care as you go.

“Don’t feel like traditional long-term care policies, if they put a poor taste in your mouth, [are] the only option,” Cheng said. “It’s really important to take a measured, tailored approach, whatever you do.”

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