While there aren’t many guarantees in financial planning for retirement, rising costs — specifically for health care — are something you can count on.

When helping clients prepare financially for retirement, I’ve found as a senior advisor at Altfest Personal Wealth Management that calculating medical costs can be perplexing because over time, these expenses have risen faster than the cost of general goods and services. We financial advisors can accommodate for this by projecting a higher rate of inflation for medical costs than for normal goods and services in a client’s plan.

But there are also other ways financial planners can help you avoid being buffeted by rising health costs in retirement, including long-term care, or LTC, insurance coverage.

Health-Care Costs Not Covered by Insurance

First, let’s talk about some costs that you might experience during retirement that aren’t necessarily covered by health insurance, once you’re on Medicare. For example, dental and vision costs, and, to some extent, prescriptions, aren’t always well-covered. In some cases, our clients are paying tens of thousands of dollars out of pocket for dental work!

While there are many studies about the overall cost you could expect for health care in general during retirement, Fidelity has one that says a couple could foresee well over $300,000 in total health-care expenses after age 65. But a cumulative figure like that doesn’t give a clear idea of the breakdown of those costs and how they get incurred over time.

Even though the cost of health care is obviously very high and something we should plan for, one way I suggest tackling it is through tax-deferred vehicles — specifically health savings accounts, or HSAs.

HSAs are an excellent way to plan for at least some of these health-related costs. If you have a high-deductible health insurance plan, an HSA is a tax-free way to put money away while also receiving an upfront tax deduction during the years you’re working. It can be a really nice way to contribute in anticipation of these health costs, and you should be focused on doing so well before age 65 because once you’re on Medicare, this vehicle is no longer available to you to save into.

Looking at Long-Term Care Costs

Next, I want to detail the key differences among health-care costs. I’ll compare what I’d consider more medical-related expenses with what I’ll call long-term care expenses. Medical costs are generally received in a professional setting, whether it’s at a hospital or in a doctor’s office. And these are, very generally, usually covered by health insurance. Because there’s often an out-of-pocket maximum or cap on these types of costs, we can properly anticipate that amount in our projections, especially during retirement when you’re on Medicare.

The more unpredictable and uncertain part of your retirement planning is potential long-term care costs. These services are generally received either in your home or at a facility that is not a hospital and only a very limited number of days are covered through Medicare. As a result, this is one of the big-expense items that we hear our clients say they’re very concerned about. How do you properly plan for it?

Before I get to the options, let’s define long-term care. I mentioned that these are generally services received outside of a hospital, but there’s also a definition that many insurance companies use for coverage of this area, which is a patient’s inability to perform two of the six activities of daily living, or ADLs. They are:

1. Eating
2. Bathing and Hygiene
3. Dressing
4. Grooming
5. Mobility
6. Toileting and Continence

For instance, we have a client who is actually claiming on their long-term care policy and is seemingly rather healthy but needs help with two of these items listed. Although she’s doing reasonably well on her own, she is getting professional help at home that’s covered by her long-term care insurance policy because of the inability to do two of the six activities well on her own.

If you’ve given thought to the possible need for long-term care — one of the more unpredictable parts of your financial plan — you may not know how to estimate or tackle what the cost will be. So, you may be debating about whether long-term care insurance is worth getting.

How Long-Term Care Insurance Compares With Other Policies

First, I’ll give you an outline of what long-term care insurance looks like and how it’s structured compared with other insurance types you may likely have: auto, term life and umbrella insurance.

Unfortunately, in the long-term care insurance world, there isn’t a lot of competition among insurers. This leads to limited choices for you as the consumer and less pricing pressure on the companies because in many states, like New York, for example, there may be only one or two insurance companies selling a certain type of long-term care insurance.

With this type of insurance, in comparison with other forms of insurance in your life, you don’t get huge leverage or bang for your premium buck unless you’re buying it very young. For example, with term life or with umbrella insurance, you might pay a very low premium for millions of dollars of coverage, but that’s not what you can expect with long-term care policies.

The reason for this, besides lack of competition, is that you’re actually very likely to use long-term care insurance. Someone turning age 65 today has a 70% chance of needing some type of long-term care support in their lifetime.

In many ways, you may view buying this type of insurance as essentially pre-paying for future long-term care expenses on a tax-preferred basis because the benefit you collect in the form of long-term care is tax-free to you.

Finally, one of the biggest concerns from clients that we hear about long-term care is, “I’ll never get my money back if I don’t use it. That’s just something I can’t get over.” But you likely don’t look at your auto or umbrella policies in that same way. The lack of a money-back guarantee should not be the primary reason you don’t buy long-term care insurance.

The Three Long-Term Care Insurance Structures

There are a few structures for long-term care insurance. Be aware that you need to be reasonably healthy to buy this type of insurance at all, and you generally can’t buy it once you reach a certain age. For example, at age 80 or after, it’s going to be highly unlikely that you’ll find an insurance company that will sell it to you.

The three distinct structures for this type of insurance can be called traditional, hybrid and life with a rider. Each has its pros and cons.

In a broad overview of each, traditional long-term care coverage is an agreement between you and the insurance company in which you pay premiums, typically annually, for your lifetime for a certain level of benefits. Importantly, you can usually add what we call an inflation rider to this level of benefits so that the coverage value can rise over time. A big concern here is whether the insurance that you’re buying will fully provide for the care you need in the future. So having an inflation rider can be a critical component, especially if you’re in your 50s or 60s now and you’re considering this type of insurance.

With traditional LTC insurance, while your premium is fixed and designed to stay that way, the premiums aren’t guaranteed to stay level. Which means that the insurance company can raise the premiums on you. We see a lot of clients facing premium hikes by well-known insurers on LTC policies they’ve held for several years, which is a concern.

Again, you don’t get your money back for this type of coverage. You either pay the premiums and ultimately don’t need to cash in to pay for care, or you pay the premiums, and you get some level of care. Know too that these policies usually will only reimburse for qualified caregivers, not family members. You can’t get help from a family member and cut them a check from the insurance policy. These payments need to go to qualified, licensed caregivers.

Hybrid policies, meanwhile, provide a small life insurance benefit, should you not need long-term care. In some ways you get a bit of your money back through these policies, which makes them appealing to many. But because of this benefit, they are more expensive on a dollar-for-dollar basis for the same level of benefits as traditional insurance.

What’s nice about this structure is that in some cases you can receive cash payment when you collect on the policy, and these payments can go toward non-qualified caregivers like family members helping you out. Again, the benefit of having some type of life insurance benefit to take advantage of if you don’t need long-term care is appealing to many people.

Finally, what I’m calling life insurance with a rider is in fact a life insurance policy that simply allows you to accelerate the death benefit, should you need long-term care before passing away. As such, if you have $1 million of life insurance, that amount won’t change over time and nor will the premiums, but the return on your life insurance benefit is highly dependent on when you die or need care.

Clearly, the decision on which policy to buy will be highly dependent on your personal circumstances and preferences. Unless you know exactly when you might need care and exactly how much, or on what exact date you might pass on, it’s really impossible to know in advance which will be the optimal financial choice. But we help clients navigate this decision among the many policy choices and insurance agents to help them make the best decision possible.

How Much Does Long-Term Care Insurance Cost?

I’m sure you’re wondering what this type of insurance costs. Firstly, for females, if you’re buying this type of insurance alone, it can be much more expensive than for a single male buying this type of policy. A married couple gets a discount because the expectation is that if one spouse is in need of some help, the healthy spouse might provide it. Insurance companies are factoring that in when they price policies.

The longer you wait, the more expensive this type of insurance will be for you. The insurance premium more than doubles if you were to wait, say to buy at age 70 rather than at age 50.

For a couple, both 60, you could be essentially paying close to $7,000 annually for about $600,000 of benefits between the two people. The leverage you get is not too bad at the outset, but you need to remember that you’re paying this premium annually for your entire lifetime. Definitely something that needs to be incorporated in your financial plan to determine affordability of a policy, alongside preparations for likely rising health-care costs.

Find Out More

At Altfest, we desire to understand who you are and what matters to you from the start. We want to learn about your concerns or any special circumstances that will affect your retirement planning. Then we’ll put together a road map to help you get to where you want to go.

If you have questions about how long-term care insurance might fit into your own financial plan, book some time with one of our experts for a complimentary consultation.

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.