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September 28, 2023
Your need for long term care is unknown. What is known is that you do need a plan for funding it, just in case. However, many people rightly ask, “is long term care insurance worth it?” Luckily there are viable alternatives to long term care insurance.
About 70% of of people who turn age 65 will need some type of long term care in their lifetime, according to the U.S. Department of Health and Human Services, but few are prepared to pay for that care.
The costs of long term care are exorbitant – ranging, on average, from $51,000 to $102,000 a year according to this survey – and are not covered by Medicare.
Despite that reality, most clients are “pretty much in denial” about long term care planning, says San Francisco-based certified financial planner and public accountant Larry Weiss, with NEXT Financial Group. Typically, the only people interested in long term care insurance (LTC insurance) have had to take care of their parents.
“Most clients aren’t aware of the needs or likelihood they’ll need long term care; they only know that long term care insurance, from their perspective, is too expensive,” says Weiss. It can also be ineffective.
So, what are you to do? Luckily there are viable alternatives to long term care insurance.
Below are 11 alternatives to long term care insurance. Most of these options can be modeled in the NewRetirement Planner. It is easy to compare your options and see what really works for you.
Okay, yes. Staying healthy and never needing long term care is the ideal plan. Even so, there are significant cons. The obvious problem with this is that are certainly no guarantees that things will go according to “plan.”
If you have significant savings, then it is probably more efficient to fund a potential long term care need with those assets rather than purchase long term care insurance.
You can even earmark those assets and invest them appropriately.
The NewRetirement Planner will model a potential long term care need and the analysis will show how much you might need to spend and when. See how much of your assets will be used and when.
Pros and cons: This method of funding long term care gives you the most flexibility. But, depending on your health, it could mean running through substantial wealth. In fact, depending on how long you need care, relying on this method may cost you more than carrying long term care insurance, life insurance, or a lifetime annuity.
People resistant to paying ongoing premiums for a product they may never use could find a solution in buying a life insurance policy with a long-term care rider.
“Buying a rider that increases the LTC benefits will allow you to get more money over time,” says Weiss. “It’s not the perfect solution, but these policies can be bought single or joint life, etc.; there’s a lot of flexibility.”
Some pros and cons: This kind of hybrid life insurance policy means that your money is doing double duty and there is a guaranteed benefit (either in the form of funding long term care insurance or death benefit). However, these policies can be expensive and the coverage is limited.
Plus, there are issues around liquidity and needing to make sure that the benefits can keep up with inflation.
A lifetime annuity is an income stream that you buy. It can be a great alternative to long term care insurance.
An increasingly common practice is to buy a deferred lifetime annuity that could be used to cover long term care costs if the need arises. You take a lump sum of money and purchase a monthly income stream that will start at some point in the future — a date when you think you might possibly need long term care.
If you need long term care, then you have an income stream to pay for it. If you do not, then the income can supplement your lifestyle. Best of all, deferred lifetime annuities can be purchased with riders to guarantee return on your principal, cost of living adjustments, survivor benefits and more.
Use the lifetime annuity calculator to see how much income your savings can buy. Or, model a deferred lifetime annuity as part of your overall retirement plan with the NewRetirement Planner.
Some pros and cons: Like life insurance, there are dual benefits to using a lifetime annuity to cover long term care. If you don’t require medical assistance, you can use the income in any way you like. A deferred lifetime annuity also offers peace of mind that your income will be guaranteed for life, no matter how long that turns out to be.
The downsides are also similar to using life insurance: lack of liquidity and growth, higher costs and fees, and needing to make sure that inflation coverage is included.
Your home is likely your most valuable asset. It can be sold and be a great source of funding for long term care.
Selling you home is a good option for homeowners who do not have a spouse, partner or child currently living in the home. Although, downsizing can also release some equity to fund care and give family members a new place to live.
Some pros and cons: Cashing in home equity allows you to leverage an existing asset, your home, to cover long-term care costs, potentially protecting your other savings and assets. However, trying to sell a home can be stressful, take time, and is not something you would not want to (and likely could not) take on during a long term care crisis.
A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows you to borrow against your home’s equity. You can draw funds as needed, and you only pay interest on the amount you use. A home equity loan, also known as a second mortgage, is a type of loan provides a lump sum of money upfront, and you repay it in fixed monthly installments.
Some pros and cons: Both loans would be a good way to use your home equity to cover long term care if you need it. However, you must qualify for these loans and in retirement, you may not have adequate income to cover the payments.
NOTE: Some people secure a HELOC before they retire and retain that line of credit for a flexible source of funding that could be used for long term care.
Some families have assets – beyond financial accounts – of significant enough value that could be sold to fund a long term care need.
Some pros and cons: There is usually a reason you are holding onto a valuable non monetary asset, and it is probably sentimental or the object has other meaning to you or your family. That can make the decision to sell it to cover a long term care need by selling the object particularly fraught. Furthermore, the market for non monetary assets is probably even more volatile than the financial markets, making this strategy risky as well.
If the type of long term care you require can occur in your own home — which is usually a more cost effective and comfortable long term care option – then a reverse mortgage can be a great option for covering your care needs.
Reverse mortgages, most of which are originated through the federally-insured Home Equity Conversion Mortgage program, enable qualified homeowners age 62 and older to borrow against their equity in the form of a non-recourse loan.
The key is to be practical about whether your home is suitable for aging in place, says Weiss.
“If you’re going to do a reverse mortgage, you need to really make sure you can live in your house for a long period of time so that it makes sense,” he says.
Pros and cons: People have strong opinions about reverse mortgages. Some people swear by them for long term care purposes. They can be an ideal way to stay in your home and get cash to help fund care. Others claim they are much too expensive to the borrower.
However, it is very important to understand that you are required to live in the home if you have a reverse mortgage on it. So, it is not the most flexible option if you aren’t sure what kind of care you will need over the long haul.
The reality is that this is how most people fund long term care. They run through their savings and opt into Medicaid.
According to the Kaiser Family Foundation, Medicaid is the primary payer for long term care. It covers 60% of all nursing home residents.
Pros and cons of using savings and qualifying for Medicaid: Depending on how long you need care, relying on this method may cost you more than carrying long term care insurance, life insurance, or a lifetime annuity. And, the type of care available once you are on Medicaid may not be a standard you are comfortable with.
Learn more about this option.
Like qualifying for Medicaid, this is a common way of handling a long term care need in many households.
Spouses and adult children often provide care.
Pros and cons of relying on family members: If this is how you plan on dealing with a potential long term care need, make sure that your family members are fully on board and really assess if it is a realistic solution for everyone involved. There are emotional, financial and practical considerations for those who require the care and those who will give it.
Another option for people who want to age in place: cohousing. Charles Durrett, an architect with McCamant & Durrett Architects and author of handbook “Senior Cohousing: A Community Approach to Independent Living,” says he has encountered seniors who view cohousing as a way to save money and stay in their homes as long as possible.
Growing up in a small town of 325 people, he saw how his grandmother—who was bedridden for the last 15 years of her life—was able to remain in her home thanks to more than a dozen friends and neighbors who took care of her.
Cohousing, he says, is reminiscent of small town care. “Some people can still fall through the cracks,” he acknowledges, “but in a setting like this, if you set it up, seniors create their own senior cohousing community.”
In many cases, communities set up onsite apartments for a caregiver whom they collectively hire. The caregiver spends a few hours a week with multiple members of the community who need care; members pay for their own care, but at more economical rates than hiring individual caregivers, according to Durrett.
“In contrast, my father had his own in-house caregiver, and it cost $7,000 a month,” he says. “My mother was in assisted care, and it cost $4,500 a month. None of it is cheap.”
While there are monthly fees to live in a cohousing community, it’s typically less expensive than facility-based long-term care, considering Genworth’s 2019 Cost of Care Survey.
“People will definitely save money living in senior cohousing,” says Durrett, citing a survey he conducted of about 200 people who reported saving between $200 and $2,400 a month by living in a cohousing community rather than a single-family home. Those savings can come from downsizing, whether it’s leaving a large house with an even larger energy bill, or going from two cars to one, he says.
“When people refer to the power of community, there are many advantages, and the most important is the day-to-day quality of life,” says Durrett. “If there’s someone who lives right across the lane from you, you can have folks readily come help.”
Pros and cons of cohousing: These arrangements are not always well regulated and can be difficult to find. However, the right situation can be an ideal long term care option.
All of the above options are viable ways to deal with a future long term care need. Use the NewRetirement Planner and run scenarios to help you assess which options is best for you.
And, whatever alternative to long term care insurance you choose, make sure your wishes are communicated to family members.
When the need for long term care arises, it is an emotional experience for everyone involved. It is best that everyone know and have buy in on your desires.
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