Long-term care insurance vs. life plan communities
As Baby Boomers continue to retire, they’ve become increasing concerned about the costs associated with long-term care, and with good reason. While life expectancy generally continues the rise, so too does the cost of long-term care. Funding this care – potentially for decades – is a genuine concern.
Questions we commonly hear include:
- Exactly how will I pay for long-term care if my spouse or I need it?
- Where will we receive this care?
- How much should I expect to pay for long-term care?
- How will my care costs affect my children or my legacy when I’m gone?
Long-term care insurance
Some of these questions can be addressed by long-term care insurance. This form of insurance provides a pool of assets you may use in various environments – such as in your home, an assisted living facility or a skilled nursing home – when your health deteriorates to a point where mobility or mental continence no longer permits you to care for yourself independently.
However, the problem for people considering long-term care insurance is that the number of contracts and types of benefits have been significantly reduced as many larger insurers have withdrawn from this market. Retirees may also find that the underwriting process for long-term care insurance has become much more conservative. For older retirees, age and health factors may actually preclude them from getting coverage.
Current policyholders are also experiencing new challenges. Significant premium increases on in-force contracts have either compelled some seniors to modify coverage by reducing their eligible benefits, or to pay more out of pocket for the benefits that their policies were originally designed to provide.
Life Plan Communities (formerly known as Continuing Care Retirement Communities)
An alternative to buying long-term care insurance is the option of entering a Life Plan Community. While Life Plan Communities have different cost structures, they effectively answer the question of where you’ll receive care. Retirees typically enter a Life Plan Community when they’re still capable of independent living and can enjoy the social aspects the community provides. Costs associated with a Life Plan Community may include a significant upfront entry fee (which is normally financed through the sale of a primary residence) and an ongoing monthly fee.
Depending on the type of Life Plan Community contract into which you enter, the cost of transitional care and accommodations (from independent living to assisted living to skilled nursing) may remain relatively predictable. Unless you’re willing to pay more in upfront entry fees, the investment in the community may be non-refundable. That would limit the amount of money you’d be able to pass along through your estate to your beneficiaries. Also, while the Life Plan Community does provide housing, it is technically not a real estate contract.
Which option is better?
The answer to this key question depends both on your qualitative desires and your financial means. A long-term care insurance policy provides benefits only when you need them, and offers some flexibility about where you’ll receive care. On the other hand, a Life Plan Community provides a lifestyle and living accommodations for anyone willing to leave their home and commit to a sizeable upfront investment.
Financially, the best outcome for a long-term care insurance policyholder would be to pay the lowest-possible premium and go on claim for an extended period of collecting benefits. However, that scenario may not represent the best “quality of life” outcome. On the Life Plan Community side of the equation, you risk forfeiting your large investment if you enter a Life Plan Community with a non-refundable contract and pass away within five years or less.
The best of both worlds?
If you already own or are thinking of purchasing long-term care insurance, it may be advantageous to coordinate the benefits of the policy with a lower-cost contract at a Life Plan Community. For example, a care community may offer a modified or “fee-for-service” contract that has a lower (or no) entry fee. If your ongoing monthly fees rise when you move from independent living to a more expensive level of care, you could tap into the long-term care insurance policy benefits as your health care costs increase.
Occasionally, it’s not an “either/or” decision between a Life Plan Community and long-term care insurance. Instead, the optimal solution may be the coordination of the right Life Plan Community contract with a long-term care insurance policy that offers an appropriate number of relevant benefits.
Weigh your choices carefully
As you can see, it’s important to spend time understanding the costs and risks associated with long-term care. Life Plan Communities and long-term care insurance both provide good ways to manage and transfer some of that risk.
Of course, some retirees may have sufficient assets to retain, or “self-insure,” against long-term care risks. However, if you’re considering paying for help to manage future health care costs through a Life Plan Community or long-term care insurance, be sure to discuss your options with a knowledgeable, objective professional like your Wealth Advisor.
ABOUT THE AUTHOR
James Ciprich, CFP®, MBA
Jim joined RegentAtlantic in 2007 and has served as chair of the Financial Planning Committee. Serving a broad range of clients, he has a particular focus on retirees considering care and housing options. Jim founded and co-chairs RegentAtlantic’s “Senior Solutions” practice specialty. He is often asked to speak at retirement communities, client events, and is frequently quoted in the media. Jim also serves on an advisory council to the MIT AgeLab. He holds the CERTIFIED FINANCIAL PLANNER™ designation and he has an MBA and a BA in Economics from Rutgers University. He served as an Adjunct Professor at Fairleigh Dickinson University in the CFP® program. Jim is a past president of his local estate planning council, and he has also served as a trustee for Morristown United Methodist Church. In recent summers, he has volunteered with Appalachia Service Project. In a prior career, Jim worked in the music industry where he was awarded multiple RIAA certified gold and platinum albums.
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