Longer lifespans and rising health care costs are driving investors to revisit 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 $4.5 trillion on health care in 2022, or nearly $13,500 per person. Overall spending rose 4.1% in 2022.¹ 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 and may live far from family, often bear the brunt of the costs, which can quickly drain retirement accounts.

Such numbers show the importance of taking 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 exciting aspects of aging can be more challenging.

Planning for Long-Term Care Costs

Research shows that an average 65-year-old couple face a 75% chance that one partner will need a significant level of long-term care.²

One year in a private room in a nursing home costs approximately $116,800 today and is projected to reach $210,954 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. More than half do not have a plan for how to pay for a chronic condition in retiremnent.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

Help Protect your Retirement Savings

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. Including the cost of long-term care in your retirement plan can make it easier to enjoy that lifestyle. 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 and potential for benefit growth in some products, younger policy holders should also consider long-term care insurance, which can help cover the cost of a nursing home stay and in-home assistance with daily living. Today, there are generally three main types of long-term care insurance available:

1. Traditional Long-Term Care Insurance: Traditional or standalone long-term care insurance creates a pool of benefit dollars to help offset expenses when receiving care for an extended period of time (policy maximums apply). Policies provide flexibility in the types of benefits and services available. 

2. Life insurance with a rider: Chronic and terminal illness rider can be added to a permanent life insurance policy in order to provide a limited pool of money for long term care services, if needed. 

3. Hybrid Life/Long-Term Care Insurance: A linked life/long-term care insurance policy can be thought of as a combination of life insurance with long-term care insurance. Linked policies use permanent life insurance as their foundation and offer long-term care rider that can be added to help pay for immediate and extended long term care services if needed. 

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.

Help Protect Your Finances

As health care costs continue to rise, it’s important to understand your options 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.