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NAIFA's Limited & Extended Care Planning Center

The LECP Center empowers professionals to network with solution and service providers to share best practices, directly access subject matter experts, research, training and resources; and provide thought leadership so we may continue to address the changing needs of the market.

There is and likely will always be a debate between what’s better: “optimistic” or “realistic” thinking. When it comes to retirement and aging, it’s beneficial to have both mindsets. To look forward to the enjoyment of the golden years while recognizing the need to plan ahead for rainy days.

This is essentially the goal of financial planning for retirement. Helping clients establish the investments necessary to fund a realistic lifestyle they can enjoy, while providing as many safeguards as possible for potential market risks. But there is another risk to retirement finances that has nothing to do with the market and everything to do with health—long-term care. For insurance agents, protection for long-term care has everything to do with finances.

According to the U.S. Department of Health and Human Services, nearly 70 percent of retirees will need some type of long-term care at some point. What is especially worrisome is 64 percent of Americans over the age of 40 make little to no plans for long-term care later in life.

Long-term care can range from getting help with basic needs like grocery shopping to full-time care in an institutional setting. The high costs of a nursing home stay are fairly obvious, but it may be shocking to see that even less intensive forms of long-term care are still very expensive.

Median costs of long-term care in 2020:

IN-HOME CARE

Homemaker Services:

  • $4,481 per month
  • $54,912 annually

Home Health Aide

  • $4,576 per month
  • $54,912 annually

COMMUNITY AND ASSISTED LIVING

Adult Day Health Care

  • $1,603 per month
  • $19,236 annually

Assisted Living Facility

  • $1,603 per month
  • $19,236 annually

NURSING HOME

Semi-Private Room

  • $7,756 per month
  • $93,072 annually

Private Room

  • $8,821 per month
  • $105,852 annually

Whether you are a financial advisor or an insurance agent, the statistics show that long-term care and associated costs will affect the majority of your elderly clients. Those same statistics indicate that most of those clients will be financially unprepared. Logically, most retirees know people who have needed long-term care, and they understand that as they age, the probability of needing help is going to increase. So why aren’t more people planning ahead?

Why More People Aren’t Planning for Long-Term Care

This goes back to the issue of optimistic thinking. And it goes beyond the assumption that the worst only happens to other people. Most people actually believe they are prepared for long-term care expenses, and the most common rationales fall into three categories of misinformation.

  1. People Who Believe Medicaid Will Take Care of the Expenses

It is true that Medicaid will pay for certain long-term care expenses, but only after very strict financial requirements are met. While these and other qualifications differ from state-to-state, generally speaking, Medicaid will only kick in after a person has exhausted their savings and assets on long-term care. Whether they realize it or not, this group of people have resigned themselves to something close to poverty in the event that they need intensive long-term care, because that is essentially a prerequisite for Medicaid funding.

  1. People Who Underestimate the Expenses of Long-Term Care

This group of people may point to a paid-off house, robust retirement savings, a sizable IRA, and maybe even pensions. But it only takes five years in a nursing home to cost about $500,000, or ten years of homemaker services. Even a wealthy retired couple can go bankrupt living on a fixed income and paying those expenses out of pocket. Additionally, the costs of long-term care are only going up.

It is estimated that by 2040, the costs across in-home care, community and assisted living, and nursing homes will rise by a combined 53 percent.

  1. People Who Believe That They Can’t Afford Long-Term Care Protection

Then there are people who would like to have some form of protection for long-term care expenses, but believe that they can’t afford it. Options like long-term care insurance, different types of life insurance, or annuities may in fact be out of reach for some people. But homeowners aged 62 and older may be eligible for a unique financial product that can fund these safeguards or at least provide a robust cushion of cash to pay for the unexpected.

A Guaranteed Line of Credit That Grows Over Time

When it comes to paying for protections against long-term care costs, or paying for it out of pocket, home equity is not much use without selling the property. Unfortunately, many seniors who are burdened with intensive long-term care costs are in fact forced to sell their homes, and then pay all the proceeds to care providers.

A Home Equity Conversion Mortgage (HECM, commonly called a reverse mortgage) loan gives many homeowners over the age of 62 the ability to liquidate a portion of their home equity, which can then be applied to retirement planning and insurance purposes*. Any remaining mortgage balance will be paid off from their loan proceeds, there will be no obligation to make monthly mortgage payments, and they will own the house just like they did before. They will simply need to continue to live in their home as their primary residence and keep up with their property taxes, homeowners insurance, and maintain the home.

But one type of reverse mortgage payout model—the HECM reverse mortgage loan line of credit—is especially useful for preparing for the unexpected. This line of credit is federally insured, can never be frozen as long as the loan terms are met, and the unused portion of the loan grows at a guaranteed rate (the same compounding interest rate as the loan balance) over time. This is just an example, but if a couple were eligible for a $200,000 line of credit in their 60s, the unused funds in the line of credit could realistically grow to more than $800,000 by the time the homeowners are in their 80s.

The Best Time to Get an Umbrella Is When It’s Not Raining

Financial advisors and insurance agents know how important it is to plan ahead and mitigate risks. It pays to explore reverse mortgage loans for protecting against out-of-control long-term care costs. For eligible clients, it’s better to do it sooner rather than later while there’s more time to put the proceeds to work—especially when it comes to the HECM reverse mortgage loan line of credit. Whether someone is worried about long-term care and retirement planning for themselves, their clients, or their parents, a reverse mortgage could be the solution they are looking for to free up funds in home equity to cover LTC expenses.

If you are interested in learning more about reverse mortgage loans and if one might be right for your client, Fairway Independent Mortgage Corporation can help. Connect with us today.

†Genworth Cost of Care Survey Conducted by CareScout, August 2020.

*This advertisement does not constitute tax and/or financial advice from Fairway

Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. Distribution to general public is prohibited. All rights reserved. Equal Housing Opportunity.

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