Long-Term Care is Becoming More Common, and More Expensive

June 13, 2024

As people live longer, the likelihood that they will eventually need long-term care is increasing. A recent study found that nearly three-quarters (70%) of people who reach the age of 65 will need long-term care at some point in their lifetimes, according to the Urban Institute and Department of Health and Human Services. Knowing what that care will look like and how it will be paid for is a major worry for many families.

Figuring out where you want to receive long-term care (at home or in a care facility), who your caregiver(s) will be, and how you will cover the costs are important parts of the financial planning process.

Long-term care costs vary greatly based on geographical location. On the low end, care in an assisted living facility in a state like Alabama costs roughly $35,000 per year, but as much as $108,000 per year in Alaska. The costs increase dramatically based on the type of care you require and desire. The national average for a private room in a nursing home was $108,405 per year, as of 2023.

Long-term care (LTC) insurance can be helpful in transferring some of the risks associated with long-term care to an insurance company. Dealing with insurance policies can be tricky sometimes, and benefits may not begin when you feel care is needed. LTC plans will cover severe chronic illnesses and cognitive decline caused by dementia or Alzheimer’s, but in many instances, coverage will not begin until you are unable to complete at least two of the six common “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.

Another issue with LTC insurance is that premiums can be quite expensive. There is a great deal of “tail risk” with long-term care. On average, Americans stay on long-term care for 3.2 years. This can be extended greatly, however, and more than 20% will need long-term care for more than five years or longer. With so much uncertainty about how much they will ultimately be paying out, insurance companies compensate by making the premiums for LTC insurance higher.

LTC premiums are generally lower for men, as they do not live as long and are less likely to use the benefits, but premiums for a healthy 55-year-old woman can range from $1,500 to $7,000 per year depending on the benefits, according to the American Association for Long-Term Care Insurance (AALTCI). The average premium for a healthy 55-year-old woman would be $3,700 annually for a benefit that grows 3% each year and yields roughly $400,000 at age 85. Premiums also get substantially more expensive the longer you wait. If that same woman waited until 60 to enroll, her yearly premium would be $4,400 and her benefit would grow to just $345,500 at age 85, according to AALTCI data.

It is estimated that only 3% to 4% of the U.S. population has LTC insurance, and many companies have stopped selling stand-alone LTC policies as risk increases and premiums spike. There are many hybrid policies on offer, such as life insurance or annuities with long-term care benefits, which are alternatives to traditional, standalone long-term care insurance.

LTC insurance is not the only way to prepare for the costs of long-term care in retirement, and financial planning can help address the concerns that many of us are facing. For more information reach out to our financial planning team today.

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