Long-Term Care Risk

Long-term care risk is the risk of losing the ability to live independently, and the associated cost of necessary care. As people grow older, they are more likely to need help performing the basic activities of daily living (basic ADLs), such as: 

  • Eating. 
  • Bathing. 
  • Dressing. 
  • Toileting.
  • Transferring (i.e., getting into and out of bed and around the house). 

Additionally, there are a number of "instrumental" (ADLs) that, while not necessary for fundamental functioning, are indeed necessary as a practical matter for independent living. These include the ability to: 

  • Do housework. 
  • Take medications as prescribed. 
  • Manage money. 
  • Shop for groceries and get around the community for errands or medical appointments. 

The Reason for Long-Term Care Risk 

Like many retirement-related risks, the need for long-term care is a result of the longer life expectancy we enjoy today. These extra years bring the need for more years of care than were faced by earlier generations of retirees. Over 50% of us will need some form of long-term care (LTC) at some point, whether it's round the clock, at home, in a nursing home, or just daily visits from a professional or family caregiver. 

  • Over 50% of us will need some form of long-term care at some point. 
  • Long-term care can drain a family of everything. 
  • You can buy long-term care insurance, or pay your expenses out of pocket, or impoverish yourself and get government assistance. 

A Shock to the Family

To the unprepared, the result can be a strain on the entire family's quality of life and financial stability. This is especially so if LTC is needed for several years, as is common, and if the care is provided by unpaid family members. Keep in mind that government assistance with LTC is only available to the impoverished, through Medicaid. Moreover, a growing number of elderly, coupled with tight state budgets, means that Medicaid eligibility criteria are likely to become even more stringent in the years ahead. Meanwhile, Medicare—an entitlement for all over 65—does not cover much in the way of LTC. The bottom line is that most of us will likely need to pay for LTC, at significant cost. A home health aide, for example, costs about $35,000–$50,000 per year, while a nursing home currently costs upwards of $70,000 per year—far more in some states, like New York and California.

How to Manage it 

There are really only three ways to manage LTC risk: 

  • Purchase LTC insurance. 
  • Pay out of pocket, using a dedicated portion of your retirement savings, or perhaps a reverse mortgage, in which you borrow against the equity in your home.
  • Impoverish yourself to qualify for government assistance. 

For many of us, LTC insurance is the most practical way to manage LTC risk; it is the only form of insurance that pays for LTC care. It is expensive (several thousand dollars per year), but if you buy at a younger age, the premium will be far lower than if you wait. You will also be less likely to be turned down for coverage.