When planning for retirement, clients often list long-term care as a primary concern. However, very few people have well defined plans for dealing with related expenses. Instead, most people rely upon family members to provide long-term care, with roughly 70% of services coming in the form of informal care provided by relatives. According to a new AARP Study, The Aging of the Baby Boom and the Growing Care Gap, the ratio of potential family caregivers to high-risk people in their 80s will decline from 7 to 1 in 2010 down to 4 to 1 in 2030, and is expected to decline to just 3 to 1 in 2050. These changing family caregiver dynamics ramp up the importance of proper long-term care planning. Consumers need to understand their long-term care risks and explore available sources of financing so they are better able to incorporate their long-term care plan into their overall retirement plan.
The financial cost of long-term care is incredibly expensive, with the average U.S. semi-private nursing home room costing roughly $85,000 a year. While the majority of people receive long-term care services from family members in an informal setting, large nursing home bills are still common and can wipe out an individual’s retirement savings. With a decreasing number of available family caregivers, individuals needing long-term care will be forced to rely more heavily on paid services, likely increasing the total cost of long-term care as family caregivers typically do not require financial compensation.
Deb Newman has focused solely on long-term care planning for over twenty years, and her Minnesota-based firm has become one of the largest long-term care insurance agencies in the country. Newman states the problem quite simply – “There is a silver tsunami coming; 10,000 people are turning 65 every day, a phenomenon that will happen for the next sixteen years. This tidal wave of baby boomers will someday soon need long-term care. Unless people begin planning now, families across the country will be overwhelmed by the flood of caregiving responsibilities.” Despite the importance of long-term care planning, many people are still unprepared.
There are a variety of factors contributing to the lack of proper planning. For instance, many people do not believe they will personally need these services. However, the actual numbers paint a different story, with roughly 70% of people projected to need care at some point. Additionally, many people mistakenly believe the government, through Medicare and Medicaid, will cover all of their long-term care costs. While Medicare does pay for some long-term care costs, it is not primarily designed for this function. Medicaid does cover long-term care costs but only once the individual meets specified asset levels, essentially when you have no money left.
Alzheimer’s disease is the number one cause necessitating long-term care services. The risk of Alzheimer’s disease increases with age. Accordingly, the likelihood of needing long-term care services rises later in retirement and will continue to increase as people live longer. Because Alzheimer’s impacts mental ability, it consequently impacts the ability to manage financial affairs. The risks associated with Alzheimer’s disease become even more pronounced if the individual has no family members to assist in his or her long-term care treatment and decisions. As such, clients need to have a plan in place before they need care.
When planning for a couple, it is important to note that men and women need long-term care services for significantly different durations. Men typically need long-term care services for 2.2 years and women for 3.7 years. “Recently, insurers have come to understand that women are a higher risk for care claims, and in 2013 most introduced gender-specific rates with premiums for women being priced substantially higher than those for men,” says Newman. In many instances, one spouse provides long-term care services for the other spouse. However, upon the death of a spouse, the surviving spouse often ends up needing institutional long-term care services. As such, it is important to have a plan in place to cover both a situation when both spouses are alive and need care and a situation when one spouse passes away.
While long-term care services are incredibly expensive, planning is more than just about finances. It is about making sure the individual is taken care of when he or she can no longer take care of him or herself. Newman says, “long-term care planning is about providing permission to family members to get the client long-term care services and help when it is finally needed. Many family members end up providing long-term care services, impacting their own health, finances, and career. However, if permission is given early on in the planning process, family members will be more willing to pay for long-term care services when needed.”
Long-term care planning can be done early in life, directly before retirement, and, in some cases, during retirement. However, it should be done before care is actually needed. In many cases, the best time period to being planning is in your 50s and early 60s, as part of your overall retirement plan. Additionally, long-term care insurance becomes significantly more difficult to acquire in your late 60s and 70s.
Perhaps the most important aspect of long-term care planning is how to finance the costs. There are a variety of options available, and for most people, a combination approach should be explored and used. Clients should understand the government programs available, including: Medicaid, Medicare (to an extent), Veterans’ benefits, and the Administration on Aging services. Clients need to understand the limitations on Medicare long-term care coverage and the asset requirements to qualify for Medicaid covered services.
Financing long-term care expenditures can be done through the purchases of long-term care insurance, which is specially designed to cover such costs. However, even insurance is not always a complete solution for financing these expenses. In some cases, it might be too expensive, not available, or just not right for the individual client. However, the individual will need to consider how much long-term care risk they want to pass onto an insurance company and how much they want to self-insure or rely upon the government. Long-term care insurance can be used to defray long-term care expenditures or provide almost comprehensive coverage. As such, it is important that clients understand they can purchase insurance to cover just a portion of their projected expenses if they believe higher levels of long-term-care insurance coverage are too expensive.
Hybrid or linked-benefit products now allow for long-term care insurance and annuity or life insurance products. These products can help cover multiple risks for one client through one product, simplifying the planning process. They also can alleviate the “use it or lose it” concerns many people have with long-term care insurance as some of the premium goes to fund another benefit, either annuity payments or a death benefit, in the event they do not need long-term care. However, this option does have a substantially higher buy-in than traditional long term care insurance.
Lastly, self-funding long-term care is an option, but it is best to use this option in conjunction with another approach to limit risk to the individual. Newman says, “self-funding is already everyone’s automatic default. If you do not have other plans in place, you are electing to self-fund. It’s just that you might not be doing it in the most efficient way possible. To truly plan ahead and self-insure for the risk, one has to be disciplined enough to set aside enough funds to cover the risk, and then not dip into those funds for anything else. You also have to hope the money you set aside for this grows at an appropriate rate. Once people understand how difficult this can be, they often prefer to transfer at least part of this risk to an insurance company.” This can be accomplished either by purchasing long-term care insurance to cover catastrophic long-term care expenditures or to prepare for Medicaid by engaging in Medicaid spend-down planning. However, in some cases, long-term care insurance and Medicaid spend-down techniques might be cost-prohibitive to the individual, essentially requiring the individual to spend down his or her assets and rely solely upon Medicaid.
Long-term care represents a difficult discussion and problem for many people, but with the decreasing availability of family caregivers, it is paramount that individuals properly plan for this risk. Clients need to have discussions about long-term care with their family and their financial advisors. If a client does not have a financial advisor, he or she should consider finding one and also looking for a retirement or long-term care specialist. Ultimately, long-term care planning is more than just a financial decision of whether or not to purchase long-term care insurance, it is a discussion about how care will be provided, where care will be provided, how this care will be paid for, and what role family members will play in the individual’s long-term care.
7/28/2014
Jamie Hopkins
www.forbes.com
