Long Term Care Overview

John Boardman

One of the most intimidating and misunderstood areas in financial planning is Long Term Care Planning.  In general, long term care is classified as ongoing healthcare needs for the basic activities of daily living such as eating, bathing, dressing, and transferring.   In most cases, a person who cannot perform even a few of these activities independently will require some sort of assistance to live comfortably.  Understandably, having to hire a nurse or aid to come to your home or living full-time in a nursing facility entails significant cost so planning around this potential need is vital, particularly for people who want to maintain assets to transfer to survivors.

There is a lot to consider in one’s own financial plan to evaluate if insuring your potential long term care need is necessary.  No one can predict exactly what their future healthcare needs will be, particularly many decades in advance.  However, we do believe understanding the statistics around likely need is important.  In 2012, Morningstar gathered a number of statistics and statistical trends from a variety of available “objective” sources (basically, they did not use insurance companies who sell policies).  A few of the important highlights were:

-The number of people over age 65 is predicted to grow from 37 million in 2005 to 81 Million in 2050 (Pew Research Center)

-78% of people who need long term care receive from friends or family (Caregiver.org)

-40% of people over age 65 will enter a long term care facility at some point during their life (Caregiver.org)

-The average long term care stay is 2.44 years (National Care Planning Council)

-10% of people admitted to nursing home stay more than 5 years (Medicare.gov)

The most important conclusion to draw from this data is that the need for care is both varied and unpredictable.   The range of care a person might need ranges from none to an extensive, long term stay in a skilled nursing facility.  Due to the need being impossible to quantify, the best approach is to measure what your personal financial situation can handle.  There are four primary methods to cover the cost of long-term care; we believe each should be considered before making a decision on long term care.

  1. Self-Insurance – For those with significant assets or income, self-insurance is an often followed route. If, for example, we project the annual costs of stay at $80,000 per year, we can project that a five year stay would cost $400,000.00.  Does the client have this or could afford to spend this?  Would spending this amount or more subject his/her family to financial difficulty? Not only would we consider a client’s assets but also their available income to determine if this is a viable option.  For those who are unable to qualify for an insurance policy, self-insurance is usually the only remaining option we will advocate saving a regular amount to cover future, potential need.  When we are creating a retirement cash flow plan, we always point to the fact that we can redirect cash flow to future health need.  Conceivably, someone admitted into a nursing home is not as active and spending as much on lifestyle expenses as he/she was when retired and healthy.
  2. Traditional Long Term Care Coverage – When most people refer to long-term care insurance, they are referring to this type of policy. There are a number of policy features that can be added but the most basic policies involve a daily benefit and a number of months or years the policy will pay.  For instance, an example of a policy we might see today would be for $200 per day and would pay for 5 years.  Other features can include inflation on benefits, home healthcare, or return of premium if the policy goes unused, just to name a few.  Adding any of these features adds to the cost of the premium.  Recently, we have noticed many clients, who purchased policies many years ago, have been receiving premium increase notices.  Most policies allow insurance companies to increase premium on an insured “class” and this can result in significantly higher costs to the insured than originally predicted.  One major advantage that we see on some modern policies in his category is what is known as “Partnership.”  Basically, this feature allows someone to protect on a dollar-for-dollar basis some amount of their net worth and still qualify for Medicaid.  For instance, a $500,000 total benefit policy would allow someone to keep $500,000 in assets and still qualify for Medicaid.
  3. Asset Based Long Term Care – There are a number of insurance companies that now offer this type of policy. In its most basic form, the insured individual makes a deposit into a policy or contract.  For doing so, the insured receives some multiple on that deposit in future long term care need.  One advantage is typically a death benefit higher than the deposited amount should the insured die prior to needing long term care.  As well, in most policies, the insured can liquidate the account at any time and receive their cash back (in doing so, losing the death benefit and long term care coverage).  This has been an attractive option for people who keep high savings and CD balances.
  4. Long Term Care Rider – Many of the major life insurance companies now offer a long term care rider on their permanent insurance policies (typically universal and whole life). It has become an attractive option to clients in the last several years as these riders have improved.  With the rider, the client purchases a policy on their own life but can receive some of the death benefit in advance of their death if he or she qualifies for a long term care need.

When considering long-term care costs and how to pay for those costs, it is important to understand that the primary role of long term coverage, in any of its forms, is estate protection.  We have all known or heard of people who have exhausted a great deal of their financial resources through significant end-of-life healthcare expenditures.  At the same time, I am often surprised when I see people paying significant premiums for policies when that same person could easily afford to self-insure.  We implore anyone to have this discussion with us so we can assess your ability to self-insure or what type of solution would fit your situation.  You will note that we waited until the very end of this article to mention Medicaid, and for good reason.  Our primary objective would be for you to prepare so Medicaid is not necessary.  Qualifying for Medicaid has become more difficult and simply “giving all of your money away” no longer works so simply.  Our advice would be to plan around funding your potential need versus relying on an already financially-strapped Medicaid system that is likely to look far different even just a few years down the road.  The entire insurance market around long term care continues to evolve and we expect continued evolution over the coming years.  We expect new policy types to be introduced and some traditional carriers to stop offering coverage altogether.  Please lean on us to help assess your need and navigate what is a very complex marketplace.

Source:  Morningstar, 2012.  Christine Benz “40 Must Know Statistics About Long-Term Care”

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