Prepare for the Real Costs of Long-Term Health Care

I loved living in Africa. I still love the wild spaces and the live-and-let-live culture. I’ll retire there for sure… my 150-year-old seaside cottage is ready and waiting.

But in my younger days, Africa came with a cost: I was far from loved ones. A round-trip ticket to the U.S. cost an entire month’s salary.

But sometimes I thought it worth it… such as when my dear grandma entered long-term care late in her life.

She was a lovely person; kind and gentle, but with a keen eye for saving a penny.

Luckily for her, when she needed round-the-clock care, a combination of sound financial planning and good timing – health care was a lot cheaper then, and Medicare had good benefits – meant she was well-provided for.

Those days, however, are over… are you ready?

Long-Term Care: It’ll Cost You

Consider these numbers:

  • The median cost of a private room in a nursing home is $250 to $350 per day, or about $91,000 to $128,000 per year.
  • The median cost of assisted living is $3,628 per month – more than $43,500 per year.
  • A home health aide for eight hours per day costs more than $40,000 per year.

Most people prepare for long-term care by calculating how much of the cost they could handle with retirement income and savings, then looking to insurance to fill any gap.

But long-term care insurance premiums have skyrocketed in recent years.

People are living longer with chronic diseases such as Alzheimer’s, like Grandma. And insurers didn’t anticipate an extended period of low interest rates, which have hit their investment returns on which they depend to pay future claims.

Consequently, premiums on long-term care insurance have soared.

In 2000, you could pay $880 per year for a $70 daily benefit, a 50-day waiting period, 5% compound inflation protection and lifetime benefits. Today a similar policy – but with a five-year maximum benefit period – would cost $2,944 per year.

Long-term care policyholders face a tough decision: Pay the increased premiums – cutting into your retirement savings! – reduce coverage, or let the policy lapse and lose the benefits.

Get Smart Instead

Fortunately, there are strategies you can adopt to cope with these rising insurance costs. Here are some of the easiest to implement:

  • Buy a combined long-term care and life policy. These pay out whether you need care or not, and the premiums are fixed. A 55-year-old man who pays $10,000 per year for 10 years could get a monthly long-term care benefit of $5,500 for up to six years, growing at 3% compounded per year. If he didn’t need long-term care, his heirs would receive a $130,000 death benefit, or he could cash in the policy and get back 80% of his premiums.
  • Add a chronic-care rider to a permanent life insurance policy when you buy it, which lets you use up to 2% of the death benefit per month for long-term care, with a $360 daily maximum. This rider tends to add 10% to 12% to the premiums

The average long-term care claim is just less than three years. That gives you scope to adjust your policy and save on premiums:

Cut inflation protection. Cutting back from 5% to 3% can reduce your premiums significantly. The older you are now, the better this option will be. Someone in his or her 70s, for example, may have already built up a big enough daily benefit at 5% inflation protection that reducing the rate to 3% or lower will be enough in the future.

Reduce the coverage term. If you have lifetime benefits, you can usually reduce coverage to three to five years, which covers the average claim period. But be aware that the reduced term may fall short of what you need if you develop a chronic disease.

Look for a “paid up” option. Regulators in some states require insurers to offer this option to policyholders who drop their insurance. Instead of losing all the coverage you paid for, you’d get a benefit based on the premiums paid.

Of course, there are other ways to reduce your health care costs, now and in the future, such as offshore health care and health savings accounts.

Don’t Set It and Forget It

Most people react quickly to changes in the investment environment. They seize opportunities and adjust their portfolios accordingly as asset values change.

Unfortunately, the same isn’t always true for insurance. There’s a tendency to buy it and let it ride. Don’t make that mistake.

If you don’t have long-term care insurance, consider getting it.

If you do, review your coverage and see whether it makes more sense to reduce it and divert some of the savings into your retirement kitty, where it might earn better returns.

After all, the future of U.S. health care is more uncertain than ever… and that’s a worry you don’t need.