Long Term Care Considerations for Retirement Planning

By Chris Chen CFP | Financial Planning

Sep 16

Long Term Care Considerations for Retirement Planning

Long Term Care is no one’s favorite topic . However, most of us will require some form of long term care at some point in time. Hence, it should be addressed in a financial plan or a retirement plan.

For many of us LTC is the most unpredictable and least planned for expense of  retirement . We just don’t have a very good way to predict how much long term care we will need, when we will need it, and how much it will cost. Paradoxically, this is exactly why planning is needed as part of normal financial or retirement planning.

According to the Federal Government, Long Term Care is the range of services and support you will need to meet health and personal care needs over a long period of time. LTC is not medical care , but rather assistance with the basic personal tasks of everyday life.

According to Genworth, a prominent provider of Long Term Care Insurance, the median annual cost in 2013 for a semi-private room in a nursing home is $75,405 per year. Based on my experience LTC costs in Massachusetts are much higher than that.

Who Pays for Long Term Care?

People often assume that Medicare or Medigap (the supplemental coverage for Medicare), or even regular health insurance will absorb the cost of their Long Term Care expense. Unfortunately, that is not the case.

In general, most people who need Long Term Care pay for it out of their own assets. Once there is no money left, Medicaid will usually take over. Take note that Medicaid is a government welfare program . This approach works best for people who have enough assets to cover any foreseeable circumstance, or people who just don’t have enough assets worth protecting.

Long Term Care Insurance

That’s why Long Term Care insurance is an important part of a financial plan . For those who have it, long term care insurance will pay for your Long Term Care expenses, up to the limit of the policy. This is a way to preserve assets for other purposes, including for your legacy.

From a tax standpoint, it is worth noting that the premiums for most classical LTC policies available today are deductible from taxable income within the limits specified by the IRS. In addition, up to certain limits, benefits are not taxed as income. Take this favorable tax treatment as a sign that Uncle Sam would like to encourage you to be covered!

So, Long Term Care insurance helps pay for long term care expenses , LTC insurance helps preserve your assets and your legacy, and LTC insurance is potentially tax deductible. So why are so many people resistant to traditional Long Term Care insurance?

First, it is expensive. Although, we might point out that the cost of insurance is normally much less than the cost of Long Term Care itself.

Second, the possibility that the insurance policy may not be used, for instance if death happens suddenly, is enough to stop many people from acquiring Long Term Care insurance. The thought of paying premiums for years, and not collecting a benefit would make the insurance a waste. For people who feel like that, there are alternatives.

Don’t Waste the Premiums

There are LTC insurance products that allow you to “not waste the premiums” . They allow you to get Long Term Care coverage if needed, and have an opportunity to get the premium paid back in case the Long Term Care benefit is not used.

Although, the details of these products is beyond the scope of this post, suffice it to say, that these alternatives can provide a lot of flexibility in a financial plan.

These three approaches (pay out of assets, traditional long term care insurance, and “not waste the premium” alternatives) all offer different benefits and should be matched to the correct circumstance and individual preference. If you need to figure out which option works best for you, get help from your financial planner.

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About the Author

Chris Chen CFP CDFA is a Wealth Strategist with Insight Financial Strategists LLC in the Boston area. He specializes in retirement planning and divorce financial planning