Long-Term Care - Can it be Affordable?

This month we are going to take a detour from our usual client interview to discuss a topic that comes up increasingly in our meetings with you: the affordability of long-term care.  I sat down with our Financial Planning Associate, Laura Knolle, who has done a lot of research on this topic recently. In turn she decided to write a comprehensive white paper on this theme and after review, because it’s so well written and content accessible, for October’s Blog I decided to publish it in its entirety. 

I think you will find this topic timely for many reasons not the least of which is that it’s a suitable tie into this fall’s opening of our national health insurance exchanges.  As a country we’ve really opened up the conversation about health care, and with an aging population (whether it’s ourselves or our loved ones), we really need to get a better handle on what it means to need this type of care and how we can best prepare for the costs and coordination.

I think you will find her paper very interesting --- she opens with a case study. I’ll let her take it from here…..

Long-Term Care – Can it be Affordable?
By Laura R. Knolle, MS, CFP®

Bob was diagnosed with brain and lung cancer in 2010.  He, and his wife, Sue, lived in a retirement community for active seniors.  Sue didn't drive much and when Bob started to decline they were unable to make it to their doctor appointments and pick up necessities such as groceries.  They began having difficulty cooking and cleaning their home.  Within a few months it became almost impossible for Bob to make any trips out of the house or to even get dressed in the morning.  As more time progressed, he had difficulty bathing and Sue wasn't strong enough to assist him and was concerned she would hurt herself trying. Their son, Jeremy, lived in a different state and was busy taking care of his wife and young children.  Their daughter, Nancy, had special needs and needed care of her own. What do they do and who can they turn to for help?

What is Long-Term Care?

Long-term care includes medical and support services for individuals with illness. Most long-term care is custodial care (1)  and not skilled care (2).  Individuals who need custodial care are unable to perform “Activities of Daily Living” such as bathing, bowel and bladder management, dressing, eating, feeding, mobility, and personal hygiene. A long-term care insurance policy covers expenses associated with custodial care.  It can also cover supervision from cognitive issues such as Alzheimer’s and Dementia that might require 24 hour care.

Why You May Need a Long-Term Care Policy.

Incorporating a long-term care insurance policy into your financial plan can help protect your assets if you need care. You don’t buy home insurance hoping your house is going to burn down and you don’t buy long-term care hoping to need care. You purchase insurance to protect yourself against a loss that you can’t afford to incur.

There are four basic resources to provide the financing you may need to cover long-term care expenses:

• rely on your family; 
• welfare programs such as Medicaid (Medical in California);
• self-insure with your assets; or 
• purchase long-term care insurance.  

The first two options are not pre-planning options; they are what you do in a crisis. The focus of this article is on the last two options, whether to completely self-insure with your assets or pass some of the risk to an insurance company by purchasing a long-term care insurance policy.

How Much Can Long-Term Care Expenses Cost?

Let’s look at some estimates on what this type of care really costs.  In the California East Bay, a home health aid would cost ~$56,000 (3)  per year.  That same care is estimated to be ~$91,000 (4)  in the year 2037.  And of course this could be twice as much for a couple.

Most people can’t afford this type of care without substantially lowering their standard of living, compromising the quality of care, limiting their care choices, or endangering their financial stability. It can be burdensome for your spouse, children, or family members to provide care if you cannot afford to hire the help you need.

Jeremy came to visit his parents over the holidays and saw the rapid decline in Bob’s health.  While in town, he interviewed and hired two caregivers who could alternate schedules to come to Bob and Sue’s home to help drive them to doctor’s appointments, pick up groceries, cook and clean. The caregivers also assisted Bob with bathing, dressing, and walking.  Jeremy remembered that his Mom and Dad had purchased a long-term care policy years ago.  He called the insurer to submit a claim. After completing the paperwork to submit the claim including a letter from Bob’s doctor and the caregivers, the claim was approved and they were able to start collecting benefits.

What Programs or Insurance Do Not Cover Long-Term Care Expenses?

There are many misunderstandings on how long-term care costs are covered.  It is important to know what does not cover long-term care expenses or has a limited benefit:

• Medicare is restricted to specific illnesses and injuries for short periods of time.  This is also true for Medigap or Medicare Advantage.  
• There are some benefits for Veterans but only for specific populations and in specific circumstances.
• Medicaid may cover some long-term care expenses but eligibility varies by state and applicants must have a certain level of impairment and limited financial resources. 
• Disability covers a loss in wages due to a disability, and not long-term care.  

Do you Self-Insure or Purchase Long-Term Care Insurance?

Now that you know how much long-term care can cost and what does not cover those costs, should you self-insure or purchase a policy?  It is important to have a discussion with your CERTIFIED FINANCIAL PLANNER™ professional to review your options.  Here are some basic steps to guide you through this process:

Step One: Estimate the Cost of Care.

• Where do you want to live during retirement?  Obtain an idea of the cost of coverage in that area. The U.S. Department of Health and Human Services has a resource online to estimate costs of care in your state. Click here to access the site.  
• Do you want to receive care in your home or a facility?  Most people want to stay in their home as long as possible.

Step Two:  Do you want to insure the full cost of care, or purchase long-term care insurance to cover some of the risk?

• Do you want to avoid having to depend on your spouse, children, or other family members for care
• Do you want to use your assets to pay for care or rely on insurance to cover the costs?
• Would you feel more comfortable to push some of the risk to an insurer by purchasing a long-term care insurance policy?

Step Three: Obtain long-term care insurance quotes.

• By obtaining quotes this will help you weigh the relative value of purchasing a plan. 
• There are a lot of bells and whistles to choose from when purchasing a long-term care policy such as the amount you receive daily or monthly, how long your policy pays, and does it have inflation protection.  It is also important to find out if the premiums may increase over time. While this can make these products complex, the numerous options also allow a policy to be customized to what you need and to what you can afford. Flexibility in products enables you to design a coverage that meets most budgets. 

Step Four: Review your options, make a decision, and a plan.

• Is purchasing a policy affordable?  If not, can the coverage be adjusted to decrease the premium?
• If you self-insure, how much will you set aside in reserves?  Make a game plan to stay on track.
• Review your plans annually with your CERTIFIED FINANCIAL PLANNER™ professional.

Years earlier Bob and Sue had spoken to their financial planner about the possible need for long-term care insurance.  It was difficult to think that a need may arise, but they knew it was important to have these conversations now while they were still in good health.  They first determined that they wanted to stay in their home as long as possible and estimated what home care was in their area. They knew they didn't want to burden their children financially with their care and decided they were more comfortable passing some of the risk to an insurance company.  Their financial planner ran long-term care insurance quotes showing various options within their budget. They reviewed several quotes and discussed with their financial planner any questions they had so they could make an informed decision. They decided to purchase an individual long-term care insurance policy on each of them to help pay for some of the risk.

Possible Ways to Reduce Your Premium.

Affordability is one of the reasons why people do not purchase a long-term care insurance policy.   Here are a few ideas that may help your premium be more financially manageable in your budget.

• Shorten the term of your policy.  Perhaps you’d like a three year policy but the premium is too high. Consider a two year policy instead.
• Share the benefit with your spouse or domestic partner.  Couples can share a combined pool of benefits for either spouse or domestic partner (or both) to use.  
• There may be discounts available to you such as couple’s discounts or preferred health. 
• Look at your options when designing a policy: Daily (or monthly) benefit amount, benefit period, elimination period, inflation protection, optional riders. These can be adjusted to meet your needs and affordability.  
• The cost for your policy will be determined by your age and health when you first apply.  Therefore the younger you are, the lower your initial annual premiums will be. 
• Also the younger you are when you apply for coverage the greater the chance you’ll qualify for a good health discount. 

Bob’s health continued to diminish and he needed care around the clock.  Jeremy and Sue were able to find a third caregiver to stay at the home overnight.  Jeremy became the Power of Attorney for his parent’s financial matters and each month would submit the expenses on behalf of his parents to the long-term care insurer. The insurer paid the approved expenses up to the limit on the policy.  While it didn't cover all of their health expenses, it did help prevent eroding their existing financial assets that Sue needed to live on.  Bob passed after needing two years of care.  Sue was thankful that she and Bob had made a plan in years past to help cover these expenses when the time came.

Summary

Long-term care doesn't have to be an all-or-nothing decision.  You can always put some level of protection in place versus ignoring the risk altogether.  Obtain the facts so you can look at your options and make an informed decision.  If you have any questions on long-term care insurance or would like to review your personal situation, please do not hesitate to call our office.

Thank you for following along with Laura’s well thought through remarks and her extremely helpful case study.  We know that every situation is unique and will involve careful consideration and planning.  Know that we are here for you as these issues arise.  Don’t hesitate to reach out to us at anytime to discuss your own personal and distinctive circumstances.  We look forward to being able to help! 

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1)  Custodial care is non-medical care that helps individuals with his/her activities of daily living.
2)  Skilled care is generally from a licensed nursing personnel or certified nursing assistant.
3)  Information obtained from the U.S. Department of Health and Human Services.  Click here to access the site.
4)  Information obtained from the U.S. Department of Health and Human Services.  Click here to access the site.