Retirement planning: Preparing for long-term care

About half of all people will need paid long-term care during their lifetime. Most of those needs will be relatively short, but about 14% of adults will require at least two years of care while another 6% will need five years or more.

The duration and incidence of the need for long-term care varies by gender. Nearly 60% of men won’t need paid care, while more than half of women will. Women are also more likely to need care for five years or more. This isn’t a result of a gender discrepancy in general health. Older men are more likely to be married than older women, largely because women have longer life expectancies and are often the younger spouse in a heterosexual couple. The result: 66% of informal caregivers are women, and men are more likely to receive the greater portion of unpaid care. 

Projected use of long-term care for people turning 65 between 2021 and 2025

Long-term care varies by duration and complexity.

• Temporary care is episodic and shorter in duration, lasting only weeks or months. Examples include rehabilitation after a hospital stay, recovery from an injury, or hospice care arising from a terminal medical condition.

• Ongoing long-term care can last many months, years, or continue through life. It is generally related to receiving assistance with activities of daily living (ADLs) and is often associated with cognitive decline, permanent disability, or other chronic conditions.

Long-term care isn’t only provided by paid caregivers or professional facilities—spouses, other family members, friends, and neighbors may act as informal caregivers. About 20% of the U.S. population provide some kind of informal care to loved ones, according to The National Care Planning Council. 

“Reliance on family and friends for care can significantly reduce the need for paid long-term care,” says Stephen M. Weber, CFP®, CLTC®, a Vanguard investment strategist and lead author of the recent white paper. “However, it's important to have a clear plan and communicate regularly with your support system so everyone is prepared.”

The costs of regular medical care—checkups, appointments with specialists, hospital stays—are largely covered by medical insurance, like Medicare. Long-term care, which often includes assistance with ADLs like bathing, dressing, and toileting, doesn’t generally require medical expertise, so it’s not covered by medical insurance.

Estimating long-term care costs is a complex yet crucial task. Factors to consider include general level of health, location, and the type of care needed or preferred. Based on these factors, the annual cost for paid long-term care can range from $25,000 for adult day care to more than $116,000 for a private room in a nursing home.² A financial advisor can help evaluate care options, estimate costs, and integrate them into a retirement plan.

“Incorporating possible long-term care costs into an income plan can help investors understand whether they’re prepared to deal with these costs,” Weber says. “Building an income plan with ‘what-if’ scenarios that incorporate a low-probability, high-cost long-term care expense can help investors feel confident that they’ll be able to weather a worst-case outcome.”

Long-term care insurance is commonly considered when planning to cover the cost of potential care. Policies are available on the private market and sometimes as an employer benefit. As with other kinds of insurance, the insured person pays premiums in exchange for benefits under specific conditions. In this case, the benefit is paid if the insured individual needs assistance with at least two ADLs or if they experience cognitive decline that requires supervision.

There are two types of long-term care insurance:

• Traditional coverage pays a daily or monthly benefit. These policies tend to be the least expensive because a benefit is typically paid only if specific conditions are met. Premiums are intended to remain level, but steep increases have occurred.

• Hybrid coverage links a long-term care benefit to a life insurance policy or annuity. The key feature is that a benefit is paid regardless of the health care outcome. If the coverage isn’t used, the benefit is received in the form of a death benefit (or cash value if it’s an annuity). The premiums are guaranteed, which means the cost of the policy, which is often higher than traditional coverage, is more certain.

Long-term care insurance has some tax benefits, although the deductibility of hybrid premiums may be limited:

• The benefit payout amounts are not taxable, just as with medical insurance benefits.

• Some premiums are deductible as a medical expense, to the extent that they contribute to medical expenses exceeding 7.5% of adjusted gross income.

• The deductible amount of the premiums increases as the policy owner ages.

• There are special tax provisions that apply to small-business owners.

Investors should carefully review all policy details to determine the best fit for their situation. Some key areas to consider are the kinds of care the benefit will cover, the maximum policy benefit pool, the elimination period, inflation/growth adjustments, and reimbursement features. 

Some investors may not qualify for long-term care insurance because of their health status. Others may decide these policies are too expensive, or that, even with a long-term care policy, they still need additional funds to cover costs. There are additional strategies to pursue:

• Delay Social Security, fund a health savings account (HSA), or set aside a dedicated asset bucket for care.

• Explore annuities—such as single premium income annuities, deferred income annuities, qualified longevity annuity contracts, or medically-underwritten options—that offer income streams. Some include enhanced payouts or long-term care riders.

• Use home equity through a sale or reverse mortgage to help fund care.

An advisor can help tailor these strategies to individual needs and determine the best fit. More details are available in the research paper’s appendix.

“Preparation for long-term care costs is a multifaceted process that requires careful planning and consideration,” Weber says. “Exploring solutions beyond long-term care insurance can provide additional layers of security.”