RETIREMENT TIPS: Long-Term Care Insurance—Good Idea?

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By ALAN KONDO, CFP, CLU

There is a good possibility that you or your spouse will eventually require some form of long-term care. According to the U.S. Department of Health and Human Services, about 70% of people aged 65 or older will enter a nursing home for some period of time during their lifetimes.¹

If the cost of long-term care (LTC) is paid out-of-pocket, it could be expensive. Because current costs are about $250 per day in California and the average length of time for LTC is around three years, an average person could pay about $250,000 in total for LTC. The two main reasons why people purchase long-term care insurance is to avoid being a burden on their children, and to prevent LTC expenses from devastating the finances of the family.²

Whether you or your spouse will require long-term care is impossible to predict, but it is wise to consider whether long-term care insurance is a good idea for you, and to understand the cost of insurance premiums and the coverage provided. Long-term care policies are complex and vary widely. But in general, LTC insurance typically covers the following:

● Nursing home care
● Adult day care
● Visiting nurses
● Assisted living
● In-home assistance with daily  activities

LTC includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. LTC insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it most frequently is used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.

Cost of Care

Perhaps the first consideration is determining the potential cost of long-term care. Below is a summary of average current costs.²

● $200/day for a semi-private room in a nursing home
● $222/day for a private room in a nursing home
● $3,300/month for care in an assisted living facility (for a one-bedroom unit)
● $19/hour for a home health aide
● $18/hour for homemaker services
● $61/day for care in an adult day health care center

With health care costs rising every year, these expenses can be expected to grow substantially over time. It is important to know that neither Medicare nor Medicare supplemental coverage (also known as Medigap insurance) typically cover long-term care. Medi-Cal (known as Medicaid in other states) will cover a large share of such services but only if you meet stringent financial and functional criteria. Therefore, most people who need long-term care must pay for some or all of it on their own.

Cost of Insurance

Like life insurance, LTC insurance policy premiums largely depend on your age and health. If you take out a policy when you are relatively young, you can expect to pay comparatively low premiums during the life of the plan. A 65-year-old in good health can expect to pay between $2,000 and $3,000 a year for a policy that covers nursing home care and home care, with premiums adjusted for inflation.³

Most long-term care policies sold today are federally tax qualified, which means the premiums paid and out-of-pocket expenses for long-term care may be applied to the medical expense deduction of the federal tax code. (Typically, taxpayers may deduct the portion of medical and dental expenses that exceed 7.5% of adjusted gross income.) Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a Certified Financial Planner™ or CPA to learn more about the tax implications of LTC insurance.

¹ U.S. Department of Health and Human Services, National Clearinghouse for Long-Term Care.
² Genworth Financial, Cost of Care Survey 2012, March 2012.
³ AARP.org, 2011.

The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

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