Weighing the costs and need for long-term care insurance — Part 1

WASHINGTON — The very mention of long-term care makes many of us want to run the other way, but with roughly 10,000 baby boomers turning 65 every day from now until 2030, the future costs of long-term care, and health care in general, are a top concern of current and soon-to-be retirees.

It’s also one of the toughest conversations between financial advisers and clients but given the rising costs of care, it’s a critical consideration for long-term retirement planning. Whether you decide to buy long-term care insurance or self-fund, it’s important to be well-informed and pro-active in your ultimate decision.

Due to the complexity of long-term care insurance and planning options available, this will be a two-part article. Here, I provide a general overview of traditional long-term care insurance and Part 2 will discuss some alternative long-term care solutions available.

Some daunting statistics for long-term care

According to Fidelity, the average couple retiring today at age 65 can expect to pay $280,000 in health care costs assuming lifespans of 87 for a man and 89 for a woman. However, this estimate does not include the cost of long-term care, such as home health aides or assisted living.

Based on a 2016 Department of Health and Human Services study, about half of Americans turning 65 today will require long-term care services during their lifetimes (47 percent for men and 58 percent for women) with most needing assistance for an average of two years. About 12 percent will need between two and five years of long-term care, and nearly one in seven adults will require five or more years.

Alzheimer’s dementia affects 10 percent of Americans over age 65 and 38 percent for those over age 85. New cases of Alzheimer’s are projected to increase 35 percent between 2017 and 2030, and estimated costs for the final five years of end-of-life care for a patient with dementia is $341,651. For those of you wondering, the average age of individuals entering a nursing home is 81. These statistics are among the “75 Must-Know Statistics About Long-Term Care.”

Now let’s turn to the potential costs of long-term care services which varies by state and type of care. Genworth, a provider of long-term care insurance, released its 2017 Cost of Care Survey stating the national average annual cost of a private room in a nursing home is $97,452 which is an increase of 5.5 percent from one year ago and a five-year annual inflation increase of 3.5 percent. Interestingly, the biggest increase in long-term care costs was for a home health aide, which increased 6 percent from 2016 to 2017, to $49,162 per year for 44 hours per week.

Summary of Genworth’s median annual 2017 long-term care costs are below:

Adult Day Care (5 days/week)              $18,200
Assisted Living (one-bedroom)        $45,000
Homemaker Services (44 hours/week)  $47,934
In-Home Health Aide (44 hours/week)  $49,192
Nursing Home (semi-private room)$85,775
Nursing Home (private room)          $97,455
Source: Genworth 2017 Cost of Care Study

What does and doesn’t long-term care insurance cover?

Before we get too far, let’s make sure we understand what long-term care insurance covers and what it doesn’t.

Long-term care (LTC) is care needed if you can no longer perform basic everyday tasks called “Activities of Daily Living” (ADL) by yourself due to a chronic illness, injury, advancing age or cognitive impairment. This type of care is not intended to cure you but is personal care that you might need for the rest of your life. ADL’s include bathing, dressing, eating, toileting, transferring and maintaining continence. Most policies start paying once you need help with two or more ADL’s after you have waited through your policy’s elimination period, which is typically 90 days. Current policies typically include memory care for Alzheimer’s and dementia; however, some older policies are more restrictive and may specifically exclude memory care so check the policy terms.

Many people immediately envision nursing homes when they think about LTC needs, but LTC insurance covers a lot more, including:

  • Care in your home, such as skilled nursing care, occupational and physical therapy, and help with personal care
  • Assisted living facilities
  • Alzheimer’s care facilities
  • Adult day care centers
  • Hospice and respite care services
  • Home modifications — like wheelchair ramps and grab bars
  • Nursing homes

Private health insurance and Medicare do not cover long-term care and support services. People sometimes confuse LTC insurance, which is for chronic and personal care, with short-term medical care.

A cautionary word about Medicare and Medicaid

Medicare does not cover long-term care and offers very limited benefits. Specifically, Medicare will pay benefits for a nursing home stay only if you have been in the hospital for at least three days within the previous 30 days, up to a maximum of 100 days for each stay. Medicare pays for skilled nursing care only, not for custodial home or intermediate care, and it pays for coverage only in Medicare-approved facilities. Should you qualify for this limited coverage, Medicare pays 100 percent of the costs for the first 20 days. For the next 80 days, you face a coinsurance payment of $167.50 per day (in 2018). Beyond 100 days, Medicare pays nothing, so you can’t rely on Medicare for long-term care costs.

Medicaid pays for about half of all long-term care costs in nursing homes. The rules are different for every state but generally, an individual must have $2,000 or less in countable assets ($3,000 for a couple) before he or she can be eligible for Medicaid. Although certain income and asset protections exist for a spouse who is not institutionalized, you generally must exhaust most of your non-excluded assets to qualify for Medicaid. Even then, you may find it difficult to find a Medicaid bed in a nursing home or be required to take the next available bed in a facility that is not your preferred one. To learn more about Medicare and Medicaid for long-term care, visit longtermcare.gov. 

Why should you consider long-term care insurance?

All choices for funding long-term care — whether family care, self-funding, private insurance or Medicaid — come with advantages and drawbacks. Depending on your age, health, family longevity and genetic factors, you may have a 50/50 chance of needing or not needing long-term care during retirement. Conversations about long-term care force us to deal with both quantitative and qualitative issues, so let’s look at some reasons why you may want to consider long-term care insurance:

  • Avoid being a burden to other family members
    None of us want our future health care needs to create a physical, emotional or financial strain on family members, regardless of our net worth. Long-term care benefits potentially offer more options such as remaining at home with professional in-home care that can be started sooner, last longer and be provided at a higher level. Families with long-term care coverage tend to seek outside professional help sooner and with less family conflict.
  • Protect family finances
    Individuals work a lifetime to accumulate assets, plan a happy retirement and leave an inheritance to their family. Given the compelling statistics and rising costs of care, self-funding a major long-term care event can suddenly devastate one’s retirement plan, leaving little (if any) assets for a surviving spouse or the next generation, as well as cause negative tax consequences.

Remember, Genworth’s Cost of Care Survey for 2017 shows the median cost of a private room averages $97,452 per year, which does not include additional services needed for Alzheimer’s care. These costs may increase approximately 5 percent per year for inflation.

Quite simply, a retired couple with a net worth of $1 million could spend their life savings very quickly if they had to cover the cost of one spouse living in a long-term care facility for Alzheimer’s at approximately $100,000 plus per year and the other living at home. It’s not hard to see how the couple could easily deplete their entire savings in four to five years given the expenses of both households with inflation.

  • Avoid the effects of potentially higher taxes
    Another impact of high long-term care expense is the potential to create a spike in your income tax bracket. Absent long-term care insurance, your choices for funding high expenses may include selling your home, selling assets in your taxable investment account, or taking funds from your retirement accounts. No matter what you decide, there will be tax implications.

Depending on your federal income tax bracket, it’s quite possible that taking just a $100,000 withdrawal from a retirement account (which is taxed as ordinary income), could push a couple into a higher tax rate bracket. If you also consider two people simultaneously needing care or care that spans multiple years, the likelihood of “tax bracket creep” increases. Ultimately, incurring more taxes than you planned depletes the total assets available to meet ongoing health care and living needs.

When dealing with a health crisis, very few people consider the impact of funding decisions on their tax bill. The tax bite of higher than expected tax costs due to long-term care spending is a common reason that an otherwise solid retirement plan becomes derailed.

We recommend that investors run several scenarios to fully understand the range of risk they may bear if they choose to forgo long-term care insurance and self-insure. It’s also why it’s wise for families making funding decisions to consult with someone who can advise them on the tax impact of various decisions. In some cases, you may be able to take advantage of more creative financing options such as using margin lines for unexpected care costs.

  • Provide liquidity
    Some business owners have significant net worth, but minimal liquidity and current cash flow. Business owners whose wealth is tied to non-income producing assets or assets that are difficult to sell may especially benefit from the predictable cash flow benefits that long-term care insurance offers.
  • Obtain peace of mind
    Numbers and dollars are important, but many people purchase long-term care insurance for peace of mind. Perhaps they witnessed someone close to them dealing with declining health issues, caring for an extended illness such as dementia or Parkinson’s, or don’t want to rely on family members for support. Each individual or family must look at the risks, costs and benefits involved, and then determine if long-term care insurance is a smart way for them to achieve peace of mind.

For more about planning for the next phase in life, read: “Aging Parents, Aging Us: How to Prepare for Your Next Phase In Life.”

The best age to buy long-term care insurance

In terms of age, the American Association for Long-Term Care Insurance (AALTCI) recommends that individuals take out a policy in their mid-50s to early-60’s when you’re still in good health. That may seem early, considering that the vast majority of claims occur when people are in their 70s or 80s, but you want to strike a balance between reasonable premium costs and the number of years you’ll need to pay them. To get the same coverage, someone who waits until age 65 to buy a policy may be charged premiums almost twice as high as those paid by an individual who bought their plan at 55.

What to look for in a long-term care policy

When considering long-term care insurance, make sure you buy a policy that covers the types of services and facilities you want and is available where you live. You should also understand any coverage exclusions and restrictions. For example, some insurance companies require you to use services from a certified home care agency or licensed professional, while other policies allow you to hire independent or nonlicensed providers or family members. Here are some other terms that are common in a long-term care policy and will impact the premium costs:

  • Inflation rider
    Since many people buy long-term care insurance 10 to 25 years before actually receiving benefits, inflation protection is an important option to consider. Indexing to inflation allows the daily benefit you choose to keep up with the rising cost of care. Most people buy inflation riders of 3 percent to 5 percent.
  • Elimination or waiting period
    A type of deductible; this is the length of time an individual must personally pay for covered services before the insurance company will begin making payments. Typically, it’s 30, 60 or 90 days. The longer the elimination period in a policy, the lower the premium.
  • Maximum daily benefit
    The preset amount that a long-term care insurance policy will pay up to each day during a claim period. The maximum daily benefit (MDB) is specified in the original policy and may increase on an annual basis if the policy holder also purchases an inflation rider. A typical MDB ranges from $150 to $300. If you have a 5 percent compound inflation rider on a $200 MDB, this MDB would be worth $531 in 20 years which is why having an inflation rider is so important.
  • Maximum benefit period
    The amount of time (usually specified in years) that a long-term care insurance policy holder will be able to collect benefits for a qualified long-term care event. If an insured had a policy with a three-year maximum benefit period but was in care for four years, only the first three years of care would be covered by their long-term care insurance.
  • Lifetime maximum benefit
    The maximum amount that a long-term care insurance company will pay for all covered expenses throughout the life of a policy. The lifetime maximum benefit is often described as a “pool of money” that an insured can draw against. When the lifetime maximum benefit is exhausted, the pool is dry and no more benefits will be paid.
  • Guaranteed renewable policy
    The company guarantees that the insured may renew the policy for life, as long as the insured pays the premiums. Long-term care policies cannot be canceled or terminated because of the policyholder’s age, physical condition or mental health. Insurance companies may only increase the premiums on guaranteed renewable policies for all policies of that particular type and may not increase the premium for an individual policy. Although companies cannot single you out for a rate increase, most premiums do increase over time, and in some cases, quite substantially.
  • Nonforfeiture option
    If you stop paying your premium or drop your benefit, a nonforfeiture option will allow you to receive a reduced benefit based on the amount of money you’ve already paid. Nonforfeiture provisions vary by state; if your policy doesn’t have this option and you stop paying the premiums, you may lose all the benefits for which you have paid.
  • Shared care
    A very popular optional benefit or plan design that allows married couples or partners to share their policy with one another that may be offered for an additional premium.

The negatives to traditional long-term care insurance

By now, you understand the overriding purpose of long-term care insurance is to safeguard families from the potential high costs of long-term care by having policyholders pay reasonable, level premiums over many years so they can use their benefits decades later if they need chronic care. Of course, in a traditional long-term care insurance policy, there is always a chance you may buy this insurance and never use it.

Unfortunately, soaring premiums have preoccupied the headlines. From a CBS News MoneyWatch article dated May 23, 2018, “for many of the roughly 7 million people who currently own a long-term care policy, premium rate increases have been dramatic, sometimes nearly doubling policy costs. Compounding those problems are the low interest rates of the past decade, which have decreased insurers’ earnings on their reserves. The result has been a sea of red ink for companies that issued long-term care policies and an exodus from the market for many carriers.”

While premiums can only be increased for a class of policy holders (not an individual policy), insurance companies are asking for rate increases because they underestimated how long their customers would live, how long they would have to pay claims and how often policies would lapse. With policyholders on the hook for these large premium increases at older ages, many have had to make some tough decisions: pay the steep rate increase, cut back on coverage or let their policy lapse and lose benefits they were counting on.

As you can see, there are many factors — personal and financial — when considering whether to purchase long-term care insurance. While the decision is not a simple one, taking the time to do your homework and having the facts you need will help you to make the right one for you and your family.

In Part 2, I plan to focus on alternative long-term care solutions such as hybrid policies that combine life insurance with long-term care insurance.

Nina Mitchell is a principal and senior wealth adviser at The Colony Group, and co-founder of Her Wealth®.


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