What is Long Term Care, Why it Is a Threat to Your Wealth, How Do You Plan For?

John Stanton |

Long Term Care- What is It Exactly?

Like it or not,  as we get older,  the odds of incurring an injury, a major illness,  or a general decline in functional health,  that will prevent us from performing simple daily functions increase substantially. Today, one in three people over the age of 65 will require assisted care of some sort. Past age 75 the odds increase to where one in two will need nursing care. With the average cost of nursing care now surpassing $8,000.00 a month, it’s no wonder that a long term care event,  and its costs,  often decimates our savings and assets.

While there is a small percentage of the retired who have amassed the assets to be able to cover long term care costs, the vast majority of  Americans would use up their savings within a few years.

There is assistance available from the government in the form of Medicare; however, it only provides limited coverage.  When seniors spend all of their assets on long term care, they may qualify for Medicaid, however, it has strict requirements and the quality of care may not be the best.

Long-Term Care:   The Activities of Daily Living

Daily activities that we take for granted,  such as feeding ourselves, bathing and maintaining personal hygiene,  getting dressed, using the restroom, being able to get out of bed,  and/or a chair,   and continence,  these are what are known as the Activities of Daily Living. 

Individuals who can no longer perform basic daily living functions such as walking, bathing, dressing,  transferring from the bed or chair,  usually need the assistance of a home health care aid,  nurse,  assisted living,  or a nursing home facility.    Home based care is what most would prefer,  if a health event occurs.


Home Based Care   

On average, it costs $240.00 per day,  for 12 hours of home based care, $7,200.00 monthly.   Care provided can  include meal preparation,  medication reminders,  light housekeeping,  assistance with dressing,  bathing,  transferring, using the bathroom,  and incontinence care, if needed.  

Assisted Living

Assisted living is a type of residence for older adults who need daily care.  Care includes all of the above within a temporary or permanent residential community. 

Current costs for Assisted Living Communities average $4,500.00 monthly. 

Skilled Nursing Care 

Nursing care,  the most advanced care,  is also the most costly.  

When and individual needs ongoing medical assistance,  such as physical therapy, occupational therapy, speech-language pathology, wound care, intravenous (IV) therapy, injections and monitoring of vital signs and medical equipment.

Memory care is another category of care,  for patients suffering from cognitive decline. Memory care is designed to provide a safe, structured environment with set routines to lower stress for people with Alzheimer's or dementia.

Employees provide meals and help residents with personal care tasks, just like the staff at an assisted living facility, but they are also specially trained to deal with the unique issues that often arise as a result of dementia or Alzheimer's. They check in with residents more frequently and provide extra structure and support to help them navigate their day.

Costs range from $8,000.00 to $15,000.00,  depending on the care needed,  and location. 

The Long Term Care Threat

The chart below shows an example the effect these costs can have on your portfolio.   This assumes an investment and retirement account balance of a little over $2 million dollars, one spouse needing care,  long term care costs needed at age 80,  and continuing for 4 years.    Home based care costs are used,  12 hours a day,  annual costs $85,000.00 in todays dollars,   $122,000.00 when this 65 year old turns 80.   

Rather than maintaining the portfolio value ,  the accounts  are drawn down by almost 50% in 4 years.   


Paying For Long-Term Care

Many people with a retirement a nest egg of $1 million  to $5 million,  feel they will just use what they have in their savings, to pay, if the need for long term care services arises.  

Other options to cover long-term care expenses include possibly a reverse mortgage,  that frees up equity in a home. 

Some health insurance plans provide some long term care benefits, but they are usually limited.

Outside of these possible options, a long-term care insurance policy can be a cost and tax effective solution.


Long-Term Care Insurance:  Not Your Fathers Insurance

Insurance protects wealth,  from events that could happen,  and have a financially stressful impact.  

I like to think about insurance,  as another source of capital to access,  if a certain life event occurs,  that does not happen very often,  but if it did,  would be quite costly. 

Our insurance philosophy is, only buy as much as you truly need,  do not over insure,  and minimize the cost of insurance.  

Here is the another look at the example of the same long term care event illustrated above,  but with an insurance contract in place.  

The green bar shows the impact of the event on the portfolio without insurance,  the purple bar shows the impact of the event with insurance. 

Long Term Care policies have come a long way since they were first offered in the late 1970s.

One of the newer contracts available is a  linked benefits life/long term care policy.   

The way these work,  a lump sum,  or an annual payment,  typically for 10 years,  is used to fund the policy. 

On the lump sum option,  a one time payment is made,  without any additional premium being due.  On a 10-20 year payment option,  the premium is guaranteed never to change.  

Other benefits include: 

A long term care benefit that can never go down,  only adjust up,  based on inflation rider chosen. 

A death benefit, guaranteed, if long term care benefits are never used.   Even if the long term care benefits are used,  a minimum death benefit applies.  

Wealth Protection Case Using a Linked Benefits Policy

(Not an actual couple,  for illustrative purpose only)

A couple,  Bob and Karen, age 60 and 58,  have put together a solid plan for Bob to retire at age 65.   

They have saved $2.5 million,  and have a paid off primary residence in the neighborhood where they raised their now grown children.

Of the $2.5 million,  $1.75  million is held in a 401K,  IRAs,  both Roth and Rollover.  $750,000 is held in taxable savings,  CDs,  investments,  with a small percentage in illiquid investments.  

During one of their review meetings with their advisor,  after going over how health insurance/medicare would work in retirement,  he asked them if they have put in place a game plan,  to have the funds available,  if they ever would need additional care ,  beyond what medicare provided.

Both Bob and Karen said that they had not.  However,  they both were familiar with the high cost of care,  and the limitations of medicare covering, from their own experience when their parents needed this care. 

Their advisor said he would like to review with them in their next meeting several options for planning for this type of event,  if it takes place with either of them. 

At their next meeting, their advisor had prepared a scenario analysis,  that walked them through what would happen if either of them needed care,  and a worse case scenario,  of both needing care at the same time. 

He then reviewed the options for paying for this care,  which in this case ,  is the following:

1. Segmenting off a portion of their savings, investing in conservative , liquid investments,  to be used if they ever needed care. 

2.  Segmenting off a portion of their savings,  and using to purchase a Linked Benefits Policy,  that would partially pay for a long term care event for either,  or both,  if needed.  

Here's how the numbers looked.


Special Account Designated for Long Term Care, if Needed


Assume first care event needed at age 80,  20 years out.   

Invested in conservative  balanced fund,  composed of stocks and bonds.  For this illustrative case, we chose the Vanguard Balanced Index Fund,  VBIAX. 

Over the past 20 years,  the average annual rate of return came in at 7.90% .   Taxes are paid on dividends and capital gains,  reinvested,  and  on the gain,  when withdrawals are taken. 

Using this average,  the $80,000.00  grew to  $171,149.00.  

This is past performance,  not guaranteed.  

Cost of care,  assuming home based,  12 hours a day,  and one of them needing,  at this point,  at age 80,  comes to $122,000.00 annually. 


Linked Benefits Insurance Policy

$80,000.00,   split ,  $40,000.00  in a  Linked Benefits Insurance Policy,  for each.    

Bob and Karen are fairly healthy,  non smokers.   

Their Advisor ran the illustrations,  from a highly rated carrier.

The balance to pay for the same scenario above,  home based,  12 hours a day,  and Karen  needing care at age 80 came to $344.563.00,  payable monthly at $4,709.00 monthly.   

This does not cover the entire amount required for Karen's care,  but will minimize the impact on the rest of the retirement portfolio. 

If Bob needed care,  his balance would be  $363,886.00 at age 80. 

If neither ever needed to pay for care,  the benefit payable to a beneficiary,  or estate would be $62,000.00 from Bob's policy,  $55,000.00 from Karen's policy.   

If both used the entire long term care balance,  a benefit of $6,230.00   from Bobs policy,   and $5,560.00 from Karen's policy would be payable to the listed beneficiary. 

All these benefits are received tax free.  

Bob and Karen saw the value of creating this pool of capital with a linked benefit insurance policy,  and decided to begin the underwriting process. 

My Personal Experience Regarding Long Term Care

Many of our clients,  when discussing this part of their plan,  ask me if we ever had a client who needed to access their long term care benefits in a policy. 

I have not,  but have had clients without the insurance,  and have had to go with planning based on the assets they have 

This also includes my personal experience,  with both my parents.   

All clients,  regardless of the path chosen to address this possibility,  clients with a game plan,  sleep much better at night.   


We can help!  Schedule a introductory call with John,  to answer any questions about long term care,  and the planning options available.



John is the founder of The Stanton Group WP.   With more than three decades of experience in the financial services industry, he serves as an advisor for clients, focusing on financial planning and the investment strategies to support their financial plan. Based in Naperville, Illinois, John serves clients in Naperville, Plainfield, Darien,  Aurora, Geneva, St Charles, and throughout the United States.  Learn more about John's services by visiting  https://www.stantongwp.com/team-member-01  or connecting with him on LinkedIn  https://www.linkedin.com/in/john-stanton/ . 

The Stanton Group WP provides investment advisory services through SeaCrest Wealth Management LLC, (the “Advisor”) a Registered Investment Advisor. Information in this message is for the intended recipient[s] only. Please visit our https://www.stantongwp.com/disclosures for important disclosures.

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This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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