We all hope for the perfect retirement, one free of financial and economic concerns, one where we can have the time and money to finally do as we feel, unbeholden to the demands of business or a boss. While we all hope for a retirement free of financial worries, the reality is that health concerns—and the associated costs—can pose significant challenges. Although Medicare covers many treatments, there are important areas, like long-term care, where coverage may be limited or even non-existent. Given the rising costs of healthcare, planning how to cover expenses not covered by Medicare or typical insurance should be a top priority to protect your retirement savings.
What are your options, then? In this article, we’ll explore one potential solution to your potential long-term care needs, long-term care (LTC) insurance, and see how it compares to investing your funds instead.
What is Long-Term Care Insurance?
Long-term care insurance covers the costs of services like nursing home care, home health care, and assistance for those with chronic illnesses or disabilities.
A typical LTC policy requires you to pay out-of-pocket for care during a specified ‘elimination period,’ which often ranges from 30 to 180 days, though adjustable according to your needs. After this period, you can file a claim for reimbursement.
As for coverage, LTC typically covers up to a certain amount in daily expenses, up to a total maximum lifetime limit, after which you’ll bear responsibility for covering the difference. Additionally, premiums may increase over time. On the plus side, your premiums may be deductible, reducing your overall tax burden.
| Attained Age Before Close of Taxable Year | 2024 Limit |
|---|---|
| 40 or less | $470 |
| More than 40 but not more than 50 | $880 |
| More than 50 but not more than 60 | $1,760 |
| More than 60 but not more than 70 | $4,710 |
| More than 70 | $5,880 |
| Long-Term Care Insurance Policy Costs - 2022 - PURCHASE AGE 60 | ||
|---|---|---|
| Based on 2022 American Association for Long-Term Care Insurance annual Price Index survey of leading LTC insurer(s) selected by consumers. Initial policy benefit equals $165,000. | ||
| Annual Premium - Purchase Age 60 | Cost | |
| Single Male, Age 60, $165,000 level benefits | $1,175 | |
| Single Male, Age 60, benefits grow at 1% yearly | $1,600 | |
| Single Male, Age 60, benefits grow at 2% yearly | $2,000 | |
| Single Male, Age 60, benefits grow at 3% yearly | $2,525 | |
| Single Male, Age 60, benefits grow at 5% yearly | $3,800 | |
| Single Female, Age 60, $165,000 level benefits | $1,900 | |
| Single Female, Age 60, benefits grow at 1% yearly | $2,550 | |
| Single Female, Age 60, benefits grow at 2% yearly | $3,300 | |
| Single Female, Age 60, benefits grow at 3% yearly | $4,300 | |
| Single Female, Age 60, benefits grow at 5% yearly | $6,600 | |
| Couple Both Age 60, $165,000 level benefits | $2,600 combined | |
| Couple Both Age 60, benefits grow at 1% yearly | $3,525 combined | |
| Couple Both Age 60, benefits grow at 2% yearly | $4,525 combined | |
| Couple Both Age 60, benefits grow at 3% yearly | $5,800 combined | |
| Couple Both Age 60, benefits grow at 5% yearly | $8,750 combined | |
So, let’s crunch some numbers and imagine that you’re a 60-year-old married couple wanting to make sure your total lifetime benefit will grow at 5% a year over 20 years. After 20 years, with a 5% compounded annual increase, that $165,000 benefit would grow to approximately $437,794, and you would pay $175,000 in premiums. Keep in mind that it’s a combined benefit split between spouses – not $437,794 each.
Now you have a solid insurance policy in place if you need it. But what if you don’t? Purchasing insurance is always a calculated risk.
What if you had decided to instead invest $8,750 a month, aiming for (and achieving) a 5% rate of return? You’d also potentially end up with $437,794 that you could spend as you please. Of course, investing isn’t guaranteed, while the insurance policy can be considered much more reliable. However, an investment strategy will be much more flexible overall; you can adjust your asset allocation as you wish to focus on a more aggressive or safer approach, depending on your life stage, health situation, and overall risk tolerance.
When Does It Make Sense to Purchase Insurance?
As a wealth management firm, we have an affinity for investing; the potential for growth and outsized returns drives us forward in our goal to enrich our clients. However, we’re also aware that investing may not be the most appropriate solution for every situation. So, if you have a family history of illness and long-term care needs, it begins to make more sense to purchase long-term care insurance. Alternatively, if you prefer stability and a clear understanding of your future benefits, LTC insurance may be the solution to your financial concerns.
When Does It Make Sense to Invest?
In our hypothetical scenario, we somewhat stacked the odds against investing. Age 60 is often an ideal time to purchase LTC insurance because premiums are more affordable compared to older ages, and you’re likely to be in better health, increasing your chances of qualifying for coverage. Additionally, starting at this age still likely gives your benefits time to grow before you start needing the coverage. However, the younger you are, the more favorable investing may become compared to LTC insurance.
Time is your best friend when it comes to investing. You can put less money into an investment account and let the power of compounding generate snowballing returns over a more extended period of time. If you have a Health Savings Account, your ability to save for health costs in retirement gets a considerable boost: deposits are tax-deductible (up to annual limits), growth is tax-deferred, and spending is tax-free, granted they’re for qualified medical costs, which long-term care usually is.
If you invest $2,000 a year into an HSA and achieve a consistent (and highly hypothetical) 10% rate of return for 40 years, you’ll end up with approximately $973,704, and your total amount of contributions over that period would only be $80,000. Yes, that is a simplified calculation that doesn’t account for inflation, market downturns, or adjusting your portfolio to a more conservative allocation as you get older. However, it still hits the point home. You’ll likely need to set aside less of your annual salary and still achieve more significant results over time compared to the benefits of purchasing long-term care insurance. .
Conclusion
Deciding whether to purchase long-term care insurance—or one of its variants, like an LTC rider or hybrid policy—is not easy. There are many factors to consider, including premium costs, age, family health history, lifestyle, and profession. However, one thing is certain: giving yourself ample time to integrate healthcare costs into your financial plan can greatly simplify decisions about insurance or alternative strategies like investing.
Is insurance the best fit for your financial plan, or could there be more lucrative options available? We’d be happy to discuss your personal situation and help incorporate rising healthcare costs into your plan. Just click the button below to get started.
