Retirement planning is a huge industry in the US. This is a good thing because more Americans than ever are prepared for financing their golden years. This is all well and good, except for one thing. Most of us don’t consider the costs of long-term health care (LTC) when we’re estimating living expenses and income. Many people don’t understand what Medicare covers until they retire or turn 65, and are shocked to discover that there is no coverage for in-home custodial care, only basic health care costs and hospital stays. If you have a chronic health condition or a disability, you’re on your own to manage payments.

What is Long-term Care?

Long-term care is daily and ongoing help with the activities of ordinary living. Unlike temporary care for an acute condition, such as post-stroke rehab or recovery from surgery, long-term care is generally a permanent situation. And it’s not end-of-life care, like Hospice, that has a somewhat predictable termination point. Instead, LTC is for seniors who have a chronic disease or disability they won’t recover from—dementia, stroke, Parkinson’s, and osteoarthritis are common reasons you would need this type of care.

Doesn’t Medicaid Cover This?

Well, yes, but that isn’t the ideal solution. To qualify for Medicaid, you must sell all of your assets some years before you think you will need LTC, and you and your family have no authority over the facilities and care you receive.

How Expensive is LTC?

Insurance premiums across the board have skyrocketed in recent years, healthcare costs are right up there—and people are living longer than ever. This is a perfect storm for LTC costs to rise faster than you’d expect, because more people are cashing in on their LTC insurance, and for longer periods of time.

Long-term care insurance is like any other policy; you pay your premiums, and when you need the care, you have a set amount of coverage. Most policies start with a $165,000 benefit that increases to $400,000 when you turn 85. If you don’t ever need the care, you lose those premium payments, just like with a term life policy.

Every situation is different, but a typical LTC policy for a couple in their late fifties has a premium of about $5,000 per year.

How Do I include LTC in My Financial Plan?

Review your assets before you make any LTC decisions. If you own your home, you may net enough when you sell to cover long-term health costs. If you choose to live in a retirement community, you’ll have that home equity for your buy-in, and you won’t have real estate taxes, maintenance, and utilities to consider anymore.

Estimate your retirement income, and figure out your living expenses as best you can. If you decide to buy a LTC policy, keep in mind that you aren’t trying to cover the full amount, but rather to ensure you have that gap between income and expense covered. Here’s an example. If you live in a facility that costs $5,000 per month and your income is $8000 per month, you don’t need an astronomical LTC policy.  A $50,000 annual benefit will pay $137 daily for care, but you’ve already have some income to contribute to your care.

The smart way to plan for your future is to plan for health care costs as well as cost of living expenses. If you’re in good health and no family history of chronic illness, you can invest so that your LTC expenses are covered with your ordinary income stream. This game plan isn’t terrible, but if you or your spouse has a chronic illness that doesn’t impact your life span, you can easily spend your entire estate in care. If you’re not planning for a legacy or an estate, this is a perfectly fine approach. But if you want to leave your heirs something besides memories, your best bet is to work with a financial planner to figure out your best options.