I have yet to meet the senior citizen who looks forward to selling their house and moving into a nursing home. Although many seniors downsize to make their lives simpler, others prefer to “age in place.” This refers to living in your home and bringing in help when needed, either until death or until it becomes impractical.
While staying put is a worthwhile goal, few people can afford it. In-home care can cost $15 an hour for simple custodial care or as much as $10,000 per month for 24-hour in-home nursing care. For a person with modest means, the options are fairly limited. Some states provide a varying degree of financial assistance with in-home care and community-style living arrangements.
The thing to realize here is that at any moment your parent or loved one may lose their ability to live independently. Where are they going to go? What can they afford? All too often these decisions get made after a crisis has presented itself. Imagine a situation in which you must care for an ailing relative, sell their home and furnishings, and move them — all at the same time. Not a pretty sight.
Many options are available to your family. You could decide to move the relative into your own home or into an assisted-living facility if appropriate. Also, continuing care facilities offer independent, assisted, and skilled nursing care all in the same location. The idea here is to decide now what you are going to do, not when you get a phone call saying today is the day.
Most seniors have a go-to person referred to as the “primary caregiver”. This person is most likely to be a family member. If you don’t have a go-to person, you need one. This is not necessarily the same person who would have power of attorney over your financial affairs, but the person you can rely on when you need something. This is a person who will stop what they are doing to come to your aid.
Sometimes the choice about who should be the primary caregiver is obvious, but not always. Most often this person is closest geographically. In any event, a family meeting should take place to determine who will be the primary caregiver, and perhaps to name an alternate. Once you’ve identified the primary go-to person, the second decision every family must make is where the ailing senior would go if he or she could no longer live independently.
What occurrence can take 100 percent of your savings, dignity, and independence? Is it marriage? Divorce? Death? Shopping? No!
Is it the cost of long-term care? Yes!
If you are a senior or approaching retirement, chances are pretty good you’ve been approached about long-term care insurance. Perhaps you or your parents have bought a policy already. Insurance companies and agents stand on pretty solid ground because it is a given that you are going to age and lose either mobility, functionality, or both.
Whether you are the aging senior or a family member of an aging senior, you need the straight story about the risks of growing older, the need for long-term care insurance, and the economic realities of the burgeoning senior population. Insurance companies and their sales forces use statistics and fear in their marketing efforts. Most families have been touched by the nursing home “dilemma” in some way. The possible horror and financial devastation of a nursing home confinement is enough to scare most anyone. You may have heard about the risks of long term care. By way of review they are as follows:
• Every individual age 65 has a 48 percent likelihood of needing long term care (defined as 90 days or longer).
• Every couple age 65 has a 78% likelihood that one of the two will need long term care (also defined as 90 days or longer).
• The average stay is 2.5 years.
• The average cost nationwide is $56,000 per year.
(this does not include Alzheimer’s facilities) Here’s what the long-term care industry doesn’t tell you:
• Two-thirds of seniors either will not need long term care,
or will be confined for 90 days or less.
• Only 10 percent of seniors will experience a stay of 5 years or longer.
• The odds that both spouses will need long-term care are 2 percent.
These statistics raise a question. If 48 percent of all 65-year-olds will need long-term care, how is it that the odds of both spouses needing it are only 2 percent? The answer is unclear, but most experts surmise that the spouse who acts as caregiver is emboldened by care giving, but typically won’t live much after the death of the first spouse.
In my opinion, the only people who need long-term care insurance are the ones who will stay five years or longer. Unfortunately, it's impossible to guess beforehand who that 10 percent will be. With the risks spelled out here, you may decide to self-insure. The concept of self-insurance is that a person either sets aside what they would have paid in premiums or other assets to be used in the event of a loss. Some losses, however, are too great to self-insure, such as a home.
The two primary reasons seniors purchase long-term care insurance are that they fear of running out of money and that they don’t want to become a burden to their families. There are also reasons people should not purchase long term care, and there are people who simply don’t qualify. This type of coverage should not be considered if the premiums would cause undue strain or are otherwise unaffordable. Those who cannot afford to self-insure should look into other planning tools, such as Medicaid planning.
Long-Term Care Explained
Considering the many great resources on long-term care insurance, this chapter is not intended not to provide a buyer’s guide or treatise on the subject. However, there are a few key nuances I’d like to illuminate. In general, long-term care is similar to disability insurance, which protects one’s income during his or her peak earning years. The key difference is that, as opposed to insuring one’s ability to work, long-term care insurance ensures one's ability to receive a wide variety of services when one can no longer live independently.
The two types of benefits available today are known as indemnity and reimbursement. Indemnity pays a flat cash payment when certain conditions are met, which then can be used to pay for any expenses the policyholder desires. Reimbursement however only pays for “covered charges”. This means that the policyholder must be receiving care by a health-care professional in order to receive benefits.
In other words, if a caregiver is a family member, there is nothing to reimburse so no payment is made. Indemnity would pay for a family member to provide care or could be used for any expenses, including food, rent, or missed work. Some long-term care policies also pay for home reconfiguration, adult day care, caregiver training for family members, and equipment.
It is estimated that more than 50 percent of all caregivers are unpaid. Most policies today pay for care provided either at home or in a nursing home provided the caregiver is licensed. Typically, a policyholder will qualify for benefits if he or she can demonstrate that they no longer can perform two out of six activities of daily living. More specifically, benefit eligibility is gained with a doctor's certification that one no longer can perform at least two of the following: preparing meals, toileting, bathing, transferring, dressing, and continence, or it is automatic with a diagnosis of Dementia.
Just as with any insurance, the premiums for long-term care insurance are determined by the risk transferred to the insurance company. Therefore, I always recommend assuming as much of the risk as is comfortable and transferring the rest. Some people can self-insure 100 percent of the risk and save money by not using any long-term care insurance. We have already determined that only 10 percent of people will suffer a financially devastating nursing home stay, but there is no way to predict who will be part of that group.
How To Reduce the Cost of Long-Term Care
The key components to the cost of long-term care are:
• Amount of daily benefit (usually from $50 to $300)
• Waiting period (30 days to 180 days)
• Length of benefit (24 months to lifetime)
• Inflation protection
If you can afford say $100,000 in long-term care expenses, you can lower your premiums considerably by using a long waiting period. This tells the insurance company that they won’t be on the hook unless you stay at least six months or more. Since it is impossible to predict how long you might be in a facility, it is generally not advisable to pick a two- or three-year benefit period. In my opinion, choosing a lower amount of coverage per day but payable for a longer period would protect you against a prolonged stay without increasing the cost.
Inflation protection is critical but expensive because health-care costs have been increasing at a faster rate than inflation. In 10 or 20 years, $100 in daily benefits will not buy as much care as it does now. Insurance companies can offer a stipulation insuring that your $100/day of benefits will always be meaningful.
Other ways to reduce the cost of long-term care involve lowering the daily benefit to an amount less than $100 or $150 per day, or shortening the benefit period. The process of mapping out a strategy involves the senior citizen and his or her caregivers sitting down and thinking through the mechanics and economics of long-term care — other than insurance. Currently, 7 million seniors are receiving care in their homes. Since Medicare doesn’t pay for “custodial care” in the home, these expenses must be borne out of pocket. A carefully thought-out plan can allow you to stay in your home for months or years. Since a skilled care facility can run upwards of $50,000 per year (after tax), many levels of care can be implemented at home (outlined in step #6). Unfortunately, many seniors do no planning and wind up moving out of their homes because of some unplanned, medically necessitated reason such as a broken hip, stroke, etc.
Long-Term Care and Estate Planning
It would seem that planning your estate and planning for the contingencies of long-term care present contradictory goals. On the one hand, the goal is to leave as much of your estate as possible to heirs, reduce transfer costs and hassles. On the other hand, considerable assets might be needed to pay for your own care and prevent your heirs from supporting you.
The good news is that through proper planning and careful selection of tools and products, you may be able to accomplish both goals simultaneously. The skills required to perform such planning are highly specialized and require years of experience and training. There are tax, legal, economic, and family dynamics issues that come into play.
For more information contact David Disraeli at 512-464-1110 or david@pcfo.net