How much long-term-care insurance do I need?

By Beth Pinsker

It's almost impossible to know the 'Goldilocks' amount without crunching a lot of data.

Lily Vittayarukskul's aunt saved far too little toward future healthcare costs, and her family struggled to afford taking care of her when she got cancer.

Chris Chen's father ended up paying too much for his long-term-care insurance, because he planned to need care in Los Angeles but ended up moving someplace much cheaper. That diverted crucial funds away from what he actually ended up needing.

Trying to find a way to help people more accurately pinpoint their coverage needs without breaking the bank brought these two together. Vittayarukskul co-founded a company called Waterlily that uses big data and elements of artificial intelligence to give more than just an estimate of a person's expected future healthcare needs. Chen, a certified financial planner based in Boston, rigorously tested the software as he looked for solutions for clients.

"The only thing we could do before was take a guesstimate," Chen said. "It's really hard to figure out."

There are scattered bits of data out there that professionals like Chen have used to help clients decide the just-right, "Goldilocks" amount they should put aside for future needs. It all points to healthcare costs being the biggest concern in retirement spending. Fidelity's most recent retiree healthcare cost study estimated that the average 65-year-old American will need $157,500 for healthcare spending in retirement, or $315,000 for a couple - and that doesn't include long-term-care costs.

The U.S. Department of Health and Human Services estimated that 70% of those over 65 will need long-term-care support at some point in old age, meaning they need help with at least two of the six activities of daily living. The Genworth cost-of-care report consistently indicates that stays in facilities average two to three years for a medical condition, and seven years for dementia, at a cost of $104,000 per year.

The trouble with such broad numbers is that real people are hardly ever average. If you make a plan to save $315,000 to cover your needs, you'll be out of luck if you end up needing $500,000. You'll also have oversaved if you need less than that, and could have used the funds for something else.

Vittayarukskul often sees these anxieties come into play when a family panics and thinks they'll have to sell a house in order to fund the long-term care of a sick family member. One recent call to Waterlily was from a family where the mom had dementia and was in assisted living, and they had six to 12 months or so of funds left to pay for it. The family wanted to know if they should go ahead and sell their house, or find another route to fund expenses after that.

"If they sell the house, they're accepting a worse quality of life, and it involves the kids earlier and more intensely," Vittayarukskul said.

The way to get a more accurate figure is to look closely at the sick person's family history and current medical circumstances, and also their financial situation. This is not something you can do in a back-of-the-envelope way or even with a spreadsheet. Waterlily said it is able to help by crunching through decades of case studies to more accurately pinpoint the length of care needed, and also the range above and below that number to create a cushion. The service mostly is available through advisers, insurance companies and care facilities to help clients, rather than directly to consumers.

With the help of an adviser, a family can then take the data and map out the costs of various care options against that time frame. Chen converts the future dollar amount to the value that has to be saved today, using the standard formulas of financial planners; then he can tell them how much they need to earmark and invest.

Chen said he's able to take it a step further than usual and compare that to what one needs to save now to fund their healthcare costs themselves, and what they'd have to pay to get insurance. "It gives you a good benchmark," he said. "If you know the cost of saving on your own, then you can decide what to get when looking at a policy. You can see if it's more or less expensive than what you can do on your own."

Adviser George Gagliardi has used this system to figure out the best path forward for a client who was facing steep increases in their long-term-care policy premiums. The insurance carrier offered six options for continuing the policy, all at different price points and levels of benefits. Gagliardi first used Waterlily's software to pinpoint the likely cost the family would have to cover, then did parallel comparisons to the different options and also built his own spreadsheet to factor in all sorts of contingencies - for instance, if the estimate was off by five or 10 months, which policy would be better?

"The only thing I had before was Genworth's annual survey, which you can use to plug in your zip code and find the current costs for home aides to get a sense. But I never had any way to narrow it down," Gagliardi said.

The real risk of not having a good way to estimate long-term-care costs is that too many people get frustrated with the uncertainty and just stop trying.

"It's hard, and nobody wants to talk about it until it's too late," said Vittayarukskul. "My family saw it all up close with my aunt. That experience made me realize how devastating it was for families to not plan, and so that became my core mission."

The goal for Vittayarukskul is for people to try to build a more concrete plan. She said that almost every family she's worked with has reduced the amount of family burden in their predicted plan, like family hours spent on care.

"That's been most gratifying," she said. "They are feeling more motivated to prepare financially in order to not be a burden to family members."

More from Beth Pinsker

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-Beth Pinsker

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06-25-24 1134ET

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