Planning to Fund Long-Term Care Expenses

Longer lifespans and rising health care costs are driving investors to control their financial exposure to uncovered care costs—particularly in retirement.

According to the U.S. Centers for Medicare and Medicaid Services, the U.S. spent approximately $4.3 trillion on health care in 2021, or more than $12,900 per person. Overall spending rose 2.7% in 2021.¹   As spending rises, patients are also shouldering a larger share of treatment costs—driving up out-of-pocket expenses. The elderly, who require the most care, often bear the brunt of the costs, which can quickly drain retirement accounts.

As the above statistics show, it is important to take steps to minimize your financial exposure to uncovered medical costs, which could potentially include long-term care expenses. However, unlike retirement planning where you are saving to afford a desired lifestyle for after your working years, planning for the less palatable aspects of aging can be more challenging.

A report from the U.S. Department of Health and Human Services estimates that people turning 65 have almost a 70% chance of needing some type of long-term care services in their remaining years.²

One year in a private room in a nursing home costs approximately $108,408 today and is projected to reach $195,792 in 20 years.³ Even with a robust portfolio, you may have trouble handling such large costs with savings on hand.

Many adults are concerned about what rising health care costs could mean for their financial future. Half of adults age 25+ are either unsure or unable to estimate their annual retirement health care costs.⁴  

Should you encounter medical issues, the costs can sometimes be high. Some people, for example, may not be aware of the uninsured costs they’d face if they were to experience a major health event such as a stroke, which may require prolonged assistance.

Medicare Part A covers nursing facility care for a limited time, but only after a qualified hospitalization. However, Medicare will not pay for nursing homes when custodial care is the only care needed; nor will it pay for care for conditions such as Alzheimer’s disease.⁵ Patients suffering from Alzheimer's or other cognitive ailments often require hands-on assistance for many years.⁶

By the time people reach their 30s, they tend to have a pretty good idea of the lifestyle they want to pursue, even in retirement. There are several ways to save for retirement with your future health care needs in mind.

Investors in their 30s or early 40s may weight their retirement-funding strategies toward a portfolio of mutual funds or a managed-account solution to provide upside exposure to the market. Given lower premiums for younger policyholders, they should also consider long-term care insurance, which can cover the costs of a nursing home stay or in-home assistance with daily living..

Today, only a handful of insurers offer long-term care insurance and it can be expensive, so another option may be life insurance with a long-term care rider, which allows families to tap into the benefits they would have received upon the insured’s death, while he or she is still alive and in need of care.

Another option for funding long-term care expenses is to withdraw or borrow money from life insurance policies or generate income from annuities.  You should review these options with your financial professional and tax advisor to understand how loans or withdrawals from insured solutions may impact future values of those products that may be earmarked for other planning goals as well as any potential tax ramifications from accessing these cash values. 

As health care costs continue to rise, it’s important to understand the options you have to help control your financial exposure to uncovered care costs. Your Morgan Stanley Financial Advisor has access to multiple long-term-care products from a wide variety of respected insurers and can help you choose the one that offers the optimal combination of cost and benefits.