The 3-Legged Stool of Long-Term Care Planning: Insurance, Savings, and Annuities

Planning for long-term care is a bit like building a sturdy stool; it needs multiple legs to stand strong. As we age, the likelihood of needing assistance, whether through in-home care, assisted living, or a nursing facility, increases significantly. The U.S. Department of Health and Human Services estimates that 70% of people over 65 will require some form of long-term care. The question isn’t if you’ll need care planning in long-term care, but how you’ll pay for it.

Enter the “3-legged stool” of long-term care planning: insurance, savings, and annuities. Each leg plays a critical role in ensuring financial stability when care becomes necessary. While long-term care insurance plans and personal savings are well-known options, annuities often get overlooked yet they can be the third leg that keeps your plan balanced and secure. Let’s break down how these three components work together to support your future.

The First Leg: Long-Term Care Insurance Plans

Long-term care insurance plans are designed specifically to cover the costs of extended care services, such as nursing homes, home health aides, or adult daycare. These policies act as a safety net, helping you avoid draining your savings or relying solely on family support when care needs arise.

• How It Works: You pay a premium (monthly or annually) in exchange for a policy that covers a set daily or monthly benefit for care services. For example, a policy might offer $200 per day for up to three years.
• Benefits: It protects your assets and provides peace of mind, especially if care costs soar beyond what you could cover out of pocket. Genworth’s 2023 Cost of Care Survey pegs the median annual cost of a private nursing home room at $108,405, well beyond most savings accounts.
• Drawbacks: Premiums can be expensive, especially if you buy later in life, and we can safely assume that they will continue to rise. Plus, if you never need care, you don’t get that money back (unless you opt for a hybrid policy with a return-of-premium feature).

Long-term care insurance plans are a cornerstone of care planning in long-term care, but they’re not a one-size-fits-all solution. That’s where the second leg comes in.

The Second Leg: Personal Savings

Savings are the most straightforward piece of the puzzle. You set aside money over the years through a 401(k), IRA, or regular savings account to cover future expenses, including long-term care. It’s the leg many people naturally lean on, but it comes with its own challenges.

• How It Works: You build a nest egg during your working years, then draw from it as needed in retirement. For long-term care, this might mean tapping into savings to pay for a home health aide or supplement insurance gaps.
• Benefits: Savings give you flexibility and control. You can use the money for care or anything else travel, gifts, or emergencies. There’s no approval process or premium to maintain.
• Drawbacks: Care costs can deplete savings faster than expected. A year in a nursing home could wipe out decades of disciplined saving, leaving little for other needs or your heirs. Inflation also erodes purchasing power over time.

Relying solely on savings for care planning in long-term care is risky – it’s like a stool with one leg, wobbly and prone to collapse under pressure. Insurance helps, but even then, the stool needs a third leg to stay steady.

The Third Leg: Annuities

Annuities often fly under the radar in long-term care discussions, but they’re a powerful tool the unsung hero that completes the 3-legged stool. Think of an annuity as a financial product that converts a lump sum into a steady income stream, often for life. When tailored for long-term care, annuities can provide both income and protection against escalating costs.

• How It Works: You pay a premium to an insurance company, either upfront or over time. In return, you receive regular payments monthly, quarterly, or annually that can help fund care. Some annuities, like those with long-term care riders, offer enhanced benefits if you need care, multiplying your payout.
• Types of Annuities for Care:
  • Fixed Annuities: Provide a guaranteed payout, ideal for predictable income.
  • Deferred Annuities: Let your money grow tax-deferred until you need it, perfect for future care planning.
  • Long-Term Care Annuities: Hybrid products (like OneAmerica’s Annuity Care) that boost payouts if you qualify for care, often doubling or tripling the base amount.
• Benefits: Annuities offer stability payments that don’t fluctuate with the market, and can stretch your dollars further than savings alone. They also reduce the risk of outliving your money, a real concern given rising life expectancies.
• Drawbacks: They require an upfront investment, and once you commit, flexibility is limited. Some annuities have fees, and returns may not keep pace with inflation unless indexed.

Annuities shine as the third leg because they complement long-term care insurance plans and savings. Insurance covers specific care costs, savings provide a cushion, and annuities ensure a reliable income stream together, they create a balanced, resilient plan.

Why the 3-Legged Stool Works

Imagine you’re 67, retired, and starting to think about care planning in long-term care. A single-leg approach, such as relying only on savings, could leave you vulnerable if care costs spike. Add long-term care insurance plans, and you’ve got two legs: protection for care expenses and a savings buffer. But what if insurance doesn’t cover everything, or premiums rise unexpectedly? That’s where annuities step in, providing a third leg of income you can count on, no matter what.

Here’s a quick example:

• Insurance: You buy a policy with a $150 daily benefit for three years, covering $164,250 total.
• Savings: You’ve saved $100,000 to cover gaps or extras like home modifications.
• Annuity: You invest $50,000 in a long-term care annuity that pays $2,000 monthly if you need care, or $1,000 if you don’t—potentially adding $24,000 annually.

Together, these three legs give you $288,250 in care funding over three years, plus leftover savings and income for other needs. Without annuities, you’d be leaning harder on insurance and savings, risking a shortfall.

Putting It Into Practice

Ready to build your 3-legged stool? Here’s how to get started:

1. Assess Your Needs: Estimate your potential long-term care costs based on your health, family history, and lifestyle. Online calculators or a financial advisor can help.
2. Explore Long-Term Care Insurance Plans: Shop around for policies that fit your budget and coverage needs. Look into hybrid options that combine insurance with annuities or life insurance.
3. Build Your Savings: Aim to save at least 6-12 months of care costs (around $50,000-$100,000) as a baseline, adjusting for your situation.
4. Consider Annuities: Talk to an advisor about fixed, deferred, or long-term care annuities. Brands like OneAmerica or Nationwide offer products tailored for care planning.
5. Review Regularly: Revisit your plan every few years—health, finances, and care costs evolve, so your plan should too.

A Real-Life Scenario

Meet John, a 70-year-old retiree with $300,000 in savings. He buys a long-term care insurance plan for $150 daily benefits ($54,750 annually), sets aside $100,000 in savings, and invests $50,000 in a deferred annuity with a long-term care rider. At 80, he needs in-home care costing $60,000 yearly. His insurance covers $54,750, savings fill the $5,250 gap, and the annuity kicks in with $1,500 monthly ($18,000 annually) for extra security. John’s 3-legged stool keeps him financially stable without draining his resources.

Care planning in long-term care doesn’t have to be a guessing game. The 3-legged stool of insurance, savings, and annuities offers a balanced, proactive approach. Long-term care insurance plans protect your assets, savings provide flexibility, and annuities the often-overlooked third leg, deliver steady income to tie it all together. By integrating all three, you’re not just preparing for the future—you’re building a foundation that stands the test of time.

So, why wobble on one or two legs when you can sit securely on three? Start exploring your options today, and give your long-term care plan the stability it deserves.