According to RICP’s 2017 Retirement Literacy Survey, 70 percent of people age 65 and older will need long-term care (LTC) at some point in their lives. And the 82 percent of respondents that feel they will not need LTC may not understand the devastating impact a critical illness can have on both their financial future and their family.
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"It is extremely hard to put a good retirement plan in place when consumers are not literate about the risks they face, and the misunderstandings about long-term care shown in the survey indicate that people don't understand the huge burden a long-term care event will have both on their finances and family," said Jamie Hopkins, retirement income program co-director at the American College of Financial Services.
Hopkins discussed with Fox Business what you need to know regarding long-term care coverage and why this benefit should be included in your retirement planning.
Boomer: What does a typical LTC policy cover that my Medicare/Medicaid does not?
Hopkins: Far too many people do not have a long-term care plan in place and a number of misconceptions are driving this lack of planning. One common misconception for many Americans is the role of Medicare in covering long-term care costs. Medicare is designed to cover health care costs and is not designed to cover long-term care expenditures. Instead, that charge belongs to Medicaid. But, in order to be eligible for Medicaid, an individual must have effectively spent down his or her own assets first before becoming eligible for the program. This is where long-term care insurance can step in to protect a person’s savings while still providing for long-term care. Medicaid also only covers the barebones of care and does not cover all types of home or institutional care that a long-term care insurance policy might cover. A long-term care insurance policy can help protect one’s savings, provide peace of mind, and help the individual maintain control of his or her care.
Boomer: When is the best time to buy a LTC policy?
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Hopkins: The best time to buy a long-term care insurance policy is while you are younger and in good health. This means looking into a policy in your 40s or early 50s. Once people reach age 60, a much higher percentage of long-term care insurance applicants are denied coverage due to underwriting concerns.
Boomer: Why don’t more people buy LTC?
Hopkins: A well-developed long-term care plan can help you get the care you want, provide proper funding, and help ease the burden on your family. While long-term care insurance can provide a valuable benefit to retirees, it remains underutilized due to a variety of factors. A mix of cost, the safety net of Medicaid, misconceptions, and denial all inhibit further use of long-term care insurance.
First, long-term care insurance costs money and is not cheap. The premiums, which can be thousands of dollars a year, often do not feel affordable for many Americans, especially when Medicaid provides a safety net for those that run out of money.
Furthermore, many Americans do not understand the differences between Medicare, Medicaid, and long-term care insurance which could be hindering proper long-term care planning. In the 2017 RICP Retirement Income Literacy Quiz conducted by The American College of Financial Services, roughly 40% of respondents were unable to answer more than 1 out of 5 questions on long-term care funding correctly. Additionally, many Americans are in denial about the fact that they are likely to need long-term care at some point in retirement. This is the superman complex; while Americans realize the prevalence and severity of long-term care costs, individuals still often deny that they will need care themselves.
Boomer: What are the drawbacks to buying LTC?
Hopkins: Long-term care insurance can be helpful in the right situation but, it is not for everyone. For many, long-term care insurance premiums are not affordable. Additionally, most long-term care insurance policies require ongoing premiums and these premiums have seen steep annual increases over the past few years. The uncertainty surrounding premium hikes can be a significant drawback for a retiree living off of a fixed income. Another issue many Americans have with long-term care insurance is the “use-it or lose-it” aspect of insurance. Many people feel hesitant buying insurance that they might never receive a payment from if they end up not needing long-term care or if their policy lapses. However, it is a good thing if you make it all the way through retirement and end up not needing long-term care!
Boomer: Will a long-term care policy pay family members who take care of their loved ones?
Hopkins: The reality is that most long-term care is provided informally and in an unpaid fashion by family members at home. But, unfortunately, not all long-term care insurance policies reimburse family members for providing long-term care. While there are still companies offering policies that cover family member provided care, these have become less widely available over the past few years. As such, it could be difficult to find a policy today that is both viewed as affordable and still covers family member provided care giving in the home.
Boomer: Are there any other options available?
Hopkins: In recent years hybrid long-term care policies have become more popular than traditional long-term care insurance policies. Hybrid policies mix together life insurance or an annuity payment with a long-term care insurance feature. These policies can sometimes require less underwriting, have fixed premium payments, and provide a death benefit or lifetime income stream even if long-term care services are not required. Hybrid policies help provide a layer of long-term care funding while alleviating the “use-it or lose-it” concern many individuals have towards long-term care insurance.