The long-term-care quandary: Helping clients prepare

By Kelley C. Long, CPA/PFS

The U.S. Department of Health and Human Services (HHS) estimates that nearly 7 out of 10 Americans will require some type of long-term care (LTC) in their lifetime. Combine that with the rising cost of care and it's no surprise that this topic is a critical consideration when discussing retirement plans with aging clients.

While the statistics seem a bit dire, it's wise to be clear on the real risks along with the options so that you can offer a calming and informed perspective when guiding clients through the maze of options.

How much care is actually needed?

According to HHS, women tend to need care longer (3.7 years) than men (2.2 years). Combined, the average is about three years. HHS also estimates that a third of today's 65-year-olds won't need any care at all, while about 20% will need it for longer than five years. So where will your clients fall on this spectrum, and how can they best financially prepare to meet this need?

Putting numbers to it

Genworth, an LTC insurance provider, puts the average annual cost for a home health aide at $54,912 a year, with the cost of a high-end private nursing home room at about $105,850 per year. Other costs for assisted-living and shared nursing home rooms fall in between.

That means, for the average woman who may need 3.7 years of care, costs for professional services can range from about $203,000 to over $391,000. Men, whose average need is 2.2 years, may incur a total cost of $120,000 to over $232,000. With the average 401(k) balance of a 60-something American being closer to $182,000, it's obvious that the need to think ahead about this is critical.

The general rule of thumb for buying LTC insurance

There's a long-standing rule of thumb that says purchasing LTC insurance coverage makes the most sense when net worth falls between $200,000 and $2 million. This assumes that if assets are less than $200,000, then LTC insurance is not financially viable considering that Medicaid would quickly kick in to cover the cost of care once assets are depleted.

On the other hand, having assets of $2 million or more is typically more than enough to pay for any type of LTC, allowing clients to forgo the cost of premiums and account for the possibility of not needing any care. For folks who fall in between, like many Americans do, then the protection offered by LTC insurance often makes sense.

Where does Medicare factor in?

Although it is widely assumed that Medicare does not cover nursing home costs, this is not entirely true. Medicare pays for up to 100 days of care in a skilled nursing facility or LTC hospital following a hospital stay of at least three days. Although Medicare does not pay for care related to more permanent conditions such as dementia, it may cover limited LTC services related to conditions from which clients are expected to recover, such as following surgery or a stroke.

Reviewing the options available

The best LTC plan for clients will depend on their specific situation: the presence of family nearby, their overall health, and the other options available such as a workplace LTC plan that is portable upon retirement.

Purchasing LTC insurance

Outside of the net-worth rule of thumb in determining the need to purchase LTC insurance, another important consideration is family situation: Is someone available to provide care that the client would be comfortable living with?

Many people buy LTC policies to avoid becoming a burden to loved ones, knowing that this insurance usually also pays for in-home care in certain circumstances. According to a 2015 AARP report, over 34 million Americans reported providing unpaid care to an adult over age 50 in the past year. Considering that many of these caregivers end up retiring sooner than planned to provide care, ensuring clients have proper coverage can have a ripple effect of providing financial security to future generations as well.

For clients planning to purchase LTC insurance, it's a best practice to have the policy in place by age 65 at the latest — waiting beyond that could lead to a rejection of coverage or a premium that seems out of reach. It's also a good idea to investigate group policies offered by a workplace, which are typically portable upon retirement, while also exploring other group discounts such as through alumni or professional associations, like those available to AICPA members.

It's worth mentioning here that there is real concern about the huge premium increases that are regularly reported by policyholders. One thing to note is that many of these increases are being seen on policies that were purchased 20 or so years ago, when there were different assumptions in place that informed the pricing. Due to increased life spans, lower lapse rates, higher costs of care, and continuously low interest rates, insurance companies are having to make adjustments for the possibility of paying out more than projected in the past.

One way to mitigate the cost if clients are faced with a steep premium increase that is out of their budget's reach is to suggest reducing the benefit period to reflect the average two- to three-year time period that most people require care. Other options are available to reduce premiums as well, so a conversation with the insurance company about those options is always wise before simply allowing the policy to lapse.

Life insurance with an LTC rider

An increasingly popular option to address the rising costs of LTC insurance along with the valid fear of clients dying before they receive benefits is to add an LTC rider to a whole life insurance policy. The upside to this strategy is the certainty that a benefit will be payable to someone, while the downside is that the policy may not pay as much in LTC benefits as a pure LTC insurance policy.

Qualified longevity annuity contracts

To address concerns about outliving one's savings, qualified longevity annuity contracts, or QLACs, are gaining in popularity. Wealthier clients may choose to use required minimum distributions from retirement accounts to fund a QLAC. The policies pay a guaranteed income for the life of the annuitant but only once they reach a certain age, usually 80 to 85.

The biggest drawback to longevity annuities is that payments end upon death, even if the policy owner hasn't started collecting yet. Another potential issue is when a policyholder needs payments to start sooner for LTC costs — a key feature of QLACs is that they don't start paying until the annuitant is in his or her 80s.

Self-insuring is always an option

Of course, one option to plan for the costs of LTC is to simply use savings, including health savings accounts (HSAs) or retirement savings. Revisiting the rule of thumb from above, people with a higher net worth of $2 million or more should be able to use their HSA, retirement, or other savings to pay for LTC costs if or when they arise.

Beyond that, self-insuring is the least expensive and most flexible option, with the trade-off being that the client is at risk of needing care longer than expected or leaving less of an inheritance than planned upon death.

Many people default to this option due to a lack of planning, but for clients who do opt to self-insure, it's best to think of them as basically earmarking a portion of their wealth for potential future LTC expenses. This should shift their investing philosophy and will be a key piece of personal financial planning as clients near retirement age.

The AICPA Personal Financial Planning Section has resources to support planning for LTC as well as other health care and retirement areas.

Kelley C. Long, CPA/PFS, CFP, is a personal financial coach in Tucson, Ariz. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld, a JofA senior editor, at

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