How to Create a Long-Term-Care Plan

Key Takeaways

• Long-term care isn't typically covered by traditional insurance or Medicare.
• Traditional tax-deferred accounts are good receptacles for long-term-care costs.
• Home equity can be a solution to help cover some expenses.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. Long-term care is a difficult topic to think about, which is probably why so many people put off creating a plan for it. Morningstar's Christine Benz is here to discuss how to create a plan to help cover long-term-care costs that might arise. Hi, Christine, nice to see you today.

Christine Benz: Hi, Susan, good to see you.

What Is Long-Term Care?

Dziubinski: Every year, you create a financial to-do list. And on the 2022 list, you suggest that September is a good time for us to think about long-term care and creating a plan for how we're going to pay for that. Let's start out with some basic questions about it. What does the term long-term care mean and how likely are we going to be to need long-term care?

Benz: Right. The term is confusing. People are confused about what it even means. It's basically care that you might need to perform what are called activities of daily living, so things like bathing yourself or getting dressed, some of those basic jobs that get more difficult as we get older or incur some sort of disability. That's the definition of long-term care. An important thing to know about it, and there's a lot of confusion about this, is that it isn't typically covered by your regular insurance. So, if you're covered by Medicare and you have a supplemental policy, long-term care would not be provided. So, there's a lot of confusion about that particular issue. Also, confusion about what Medicare does provide, because if you have a qualifying hospital stay, you are entitled to what's called rehab, which is kind of a form of long-term care. But anyway, in general, this is not going to be covered by your traditional insurance or Medicare.

In terms of how likely we are to need it, this is also a confusing and gray area. The data show that roughly half of us need some type of long-term care in our lifetimes. What is a big variable is the duration of that care. And so, some of that care may be provided over a very short time horizon. It might be provided by unpaid caregivers in your life, friends and family members, for example. A smaller segment of our population, roughly 20% when we look at the data, has a sustained long-term-care need of five years or more. And that's, I think the kind of catastrophic long-term-care need that really keeps seniors up at night or keeps older adults up at night, because of course, that can be ruinous in terms of your finances.

When to Create a Long-Term-Care Plan

Dziubinski: At what age should we start thinking about creating some sort of long-term-care plan?

Benz: Well, the earlier, the better. Ideally, if you could start thinking about this when you're in your late 40s or 50s, that's probably a good time to explore what your plan is, which is not necessarily to say you need to go out and buy insurance, but at least think through, "Well, what am I thinking about this? Does it appear that I'll have the resources to cover long-term care if I should need to pay it out of pocket?" So, start thinking about it. And the reason why earlier is better, is because the longer you wait, the longer you are to have some condition that will disqualify you from insurance. And so, that will just simply shrink your options. It's better to go into this decision-making with the widest set of options that you possibly can have.

Dziubinski: Let's talk a little bit about what role wealth might play here. If you have accumulated a certain amount of assets, is covering long-term care financially not really something you need to worry about or be concerned about?

Benz: Well, there's a lot of confusion about this, too, Susan. I sometimes see that people throw out these numbers where they say, "Well, if you have a one and a half million dollar portfolio or a $2 million portfolio, don't worry about long-term care because you can probably self fund." And the reason I get frustrated when I see that is because I don't know what someone's spending from that $2 million portfolio. If their spending is such that their portfolio will only take them through their own lifetimes without any additional long-term-care expenses, it may not be enough. So, I like the idea of using a potential long-term-care need to decide how much you would need to set aside in addition to your basic in-retirement spending.

So, if you use a year's worth of long-term care as sort of a benchmark, that's about $100,000 now, give or take, depending on where you live, the typical long-term-care stay is in the neighborhood of two years or so. So, you're thinking about maybe $200,000 per person, in addition to whatever portfolio you have that will take you through your own spending during your retirement.

Self-Funding Long-Term Care

Dziubinski: Christine, I'm assuming that there are a good portion of the viewers watching today who fall into that camp of wanting to self-fund their own long-term-care expenses. So, if someone's watching and that's him or her, where do you suggest they be investing these assets that they're earmarking for long-term care?

Benz: Really good question, Susan. And really, I would take that in two parts. The first question is what account type, and looking at traditional tax-deferred accounts, they tend to be a pretty good receptacle for long-term-care costs. The traditional tax-deferred accounts--your IRAs, your 401(k)s, and so forth--have heavy strings attached to them when you're pulling the money out, you're taxed at your ordinary income tax rate. The one positive, if we can call it that with long-term care, is that those expenses are generally deductible. And so, it's good to match that wrapper that has heavy tax costs associated with it for a withdrawal that will probably entail a nice tax deduction. So, I would say that's a good receptacle to think about. The good news is that most of us have traditional tax-deferred accounts.

And then in terms of how to invest the funds, like where to invest them, I think it's wise to use your time horizon to inform that. So, if you're someone who's say in your 50s and you're setting aside a long-term-care fund, or early 60s, well, your long-term-care need very likely will be quite a bit further into the future. So, you'd want to have a nice long time horizon in mind for that portion of your portfolio. If you're an older retiree, if you're someone who's in your 80s, well, I'd want to think about derisking that portion of the portfolio so that I have the safe assets that I might need to cover those costs because they may come up sooner than you might think.

Using Home Equity

Dziubinski: How might home equity fit into the equation?

Benz: I think this is really underdiscussed in the long-term-care context. From a practical standpoint, I think this can be a really neat solution. So, say you have a single homeowner, might liquefy that home or move into some sort of an assisted-living setting to receive care. So, that can be an elegant solution where you do have home equity that enters the picture that is able to cover some of those costs. For married couples, it gets a little more complicated because oftentimes you have a well spouse who wants to remain in that home, but in that case, a reverse mortgage might be worth exploring. Not the right answers for everyone, but I think that thinking through home equity and whether you have it can maybe help alleviate some of these worries.

Long-Term-Care Insurance Options

Dziubinski: What about long-term-care insurance these days, Christine? What are the main options that are available there, and who might this be a good fit for?

Benz: It's a complicated topic, Susan. The pure long-term-care insurance that covers you for long-term-care needs has gotten really expensive. And sort of a double whammy has been that even people who bought policies a long time ago with reasonable premiums have seen their premiums go up quite a bit. So, it's a troubled marketplace. We've seen the number of pure long-term-care insurance policies and carriers shrink significantly. An area that we have seen more emphasis on in the insurance space is what's called the hybrid policies. These are typically life insurance policies with a long-term-care insurance rider, or they might be annuities with a long-term-care insurance rider.

I think that they're coming on strong in place of the pure long-term-care policies. There's a lot to like about them, especially for people who have life insurance that they don't necessarily have a need for. Their dependents may have grown and left the nest. So, it's a nice way to trade off that risk for the risk that you're concerned about now, which for older adults is oftentimes long-term-care risk.

Managing the Logistics of Care at Home

Dziubinski: What are some of the nonfinancial aspects of long-term care that we should be thinking about as part of the plan? What should be the types of things that people really need to think through?

Benz: Well, one of the big ones is setting where you would like to receive care if you should need it. Many people, if we were to ask them, they would say, "In my home. I'd like to stay in my home and receive care through caregivers who come into my home." One thing I would say, Susan, is that if that's your plan, and I think it's probably the plan for many older adults, is sort of think through, well, what are the logistics of that? Who is going to help me hire and manage these caregivers? Who's going to manage the house on an ongoing basis if I'm not able to do that? So, it's not enough just to have the financial ducks in a row, you also need to think about, well, if my plan is to receive care in my home, how will I make that home continue to work for me if I'm not able to care for the home?

Dziubinski: Well, Christine, thank you for your time today. It's a very important topic. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.

Watch 3 Down-Market Strategies for Retirees and What You Need to Know About Estate Planning for additional advice from Christine Benz.