The good news about long-term care is that the cost is rising at a slower rate. Yet, LTC still is expensive and its cost is rising at a faster rate than general inflation. 

The latest annual Cost of Care Survey from Genworth, the leading LTC insurer, found that when LTC is needed the average length of care is about three years.

Nationally home care from a home health aide hired through an agency is $19.75 per hour. That’s only a 1.32% annual increase over five years. Yet, 44 hours of care 52 weeks a year for three years totals $136,000. 

The median monthly rate for an assisted living facility is $3,500, and that’s increased 4.29% annually over five years. Nursing home care is over $7,200 per month. Those costs are for the basics, excluding any ancillary services and care that might be needed.

If you’re around 60 or 65 today, you might not need long-term care for another 20 years. Project these costs at 3% inflation, and you’ll have an idea of the potential costs you face.

It’s no wonder that survey after survey shows long-term care expenses are among the top worries of Americans in or near retirement. You could have a dynamite estate plan yet have most of your estate pay long-term care expenses instead of going to your loved ones.

It doesn’t have to be that way. You can develop a plan to pay for potential long-term care expenses and keep most of your estate intact. There isn’t one silver bullet or strategy. Instead, use all the tools at your disposal to construct a protective moat around your estate. Here are the main tools available:

Long-term care insurance. LTCI had a rough few years. Many insurers left the market, and most others raised premiums significantly and tightened underwriting standards, so fewer people are eligible to buy LTCI.

The good news is steep premium increases probably are history. The existing insurers have experience in LTCI and updated the assumptions used to set premiums.

Even so, LTCI is expensive, and many people can’t afford full coverage. We discussed in the past the five elements of a policy that can be adjusted to develop affordable basic cover-age. See the June 2012 visit, which is available on the members’ section of the web site.

Another reason few people buy LTCI is its use-it-or-lose-it feature. If you don’t need LTC or need only a small amount during your lifetime, you paid a lot of premiums for care you never needed. That’s a good reason to buy an affordable LTCI policy to cover basic care and look at other options to cover any additional care. You also should buy LTCI during your 50s if you can. It is less expensive and you’re more likely to be medically-qualified to buy.

Employer and group policies. Group policy premiums can be lower than individual policies, though you won’t have as much flexibility. You usually can’t adjust all the terms to reduce the premiums or obtain the level of coverage you want.

Self-insurance. You’ll expend some of your funds for long-term care. Even if you have the best LTCI policy, the benefits won’t kick in until you need long-term care for a minimum period, known as the elimination period, which usually is 90 days. You pay for all care during that period. There also are likely to be expenses that aren’t covered.

But many people plan to self-insure for the bulk of any long-term care they need. That means accumulating a couple of hundred thousand dollars or more designated for potential LTC expenses. The questions are what to do with that money before LTC is needed and how to make the self-insurance fund as large as possible. Keep reading for some ideas with good potential.

Combination annuity/LTCI. Many insurers that issue annuities offer an LTC rider. The details differ, but the better policies generally work like this.

You transfer a lump sum to the insurer as an annuity deposit and select the LTC rider. In the future, if you need LTC, the annuity will begin paying you monthly benefits over a period you pre-selected. The maximum LTC benefit will be three to five times your initial deposit, depending on the annuity. For example, if you deposit $100,000 into an annuity and select the LTC rider with a three times LTC benefit, you now have $300,000 available for LTC.

You still can take income or distributions during your lifetime, but distributions will reduce the amount available for any future LTC. If you never need LTC and don’t withdraw anything from the annuity, your beneficiaries will receive the annuity balance (but not the extra LTC amount). When you need LTC benefits, they first come from your deposit. So, if you withdraw $100,000 for LTC, there won’t be anything for your beneficiary.

Combination life insurance/LTCI. Permanent (not term) life insurance also comes with LTC riders. As with the annuities, the LTC coverage is a multiple of three to five times your deposit and usually is paid as 2% to 4% per month of the face value of the insurance policy.

Here’s how one of these policies works. You buy the policy and LTC rider with a $100,000 deposit. The cash value typically is a little less than is your deposit initially, but can grow depending upon the interest crediting of the plan you select.  Meanwhile, your $100,000 buys up to $400,000 of a combination of life insurance or long term care benefits.  You either use the money for long-term care expenses while you are living, or you can leave the tax free life insurance to your beneficiaries.

When you need LTC, the policy makes monthly distributions at a predetermined rate for a predetermined time. For example, a standard payout would be 2% of the LTC benefit monthly for 50 months. For a 65 year old female in good health, $100,000 would buy over $300,000 in life insurance as well as $6,000 of monthly long term care benefits. The actual amount is likely to be higher because of income on the policy’s cash value.

The distributions from the life insurance to pay for LTC are free of income taxes thanks to a 2006 law.

Again, if you never need LTC, the life insurance face value is paid to your beneficiaries. You also might have access to the cash value to pay other expenses during your lifetime, but that would reduce the potential LTC benefit or the amount paid to your beneficiaries.

Most of the annuity LTC/Combo options do not require a medical exam, and neither do a few of the life insurance plans. But they do require medical underwriting that involves a telephone interview and perhaps completing a questionnaire.

Permanent life insurance. Some people view plain permanent life insurance as their LTC plan. They buy a life insurance policy payable to their loved ones and without an LTC rider. They figure to spend down their assets if they need LTC. After they pass away their loved ones will receive the insurance benefits tax free. If they never need LTC, their loved ones receive both their estate and the insurance benefits. They figure plain permanent life insurance is cheaper than LTC or life insurance with an LTC rider.

The problem is there is no control over when the life insurance pays. You could spend down your entire estate and still need years of LTC. If you then go on Medicaid, the state still might seek reimbursement from your estate or heirs, and your care under Medicaid is likely to be of lower quality than under private pay.

The annuity and life insurance options can be complicated. There are a lot of policies out there, and they aren’t created equal by any means. To sort through them and determine the best choice for you, I recommend Todd Phillips of Phillips Financial Services. Call 1-888-892-1102 and ask for a personalized LTC Option Study. He will lay out the best options for your review and help you find the plan most likely to meet your personal objectives.

LTCI is just one tool in a toolbox. You’re most likely to have financial security and protect your estate by using everything in the toolbox.