Long-Term Care Planning 101
One of the most difficult decisions clients will make in the financial planning process is planning for long-term care (LTC). With LTC, I’m referring to the possibility that at some point, you or a family member will require some form of care to help with your daily life for an extended period of time, whether due to physical or mental limitations (or both).
The economics of LTC can be difficult to factor into a financial plan because the range of outcomes is vast. With LTC, you are also dealing with what can be an emotionally and physically draining experience for the whole family. But some of that potential family stress can be reduced, at least in part, with the proper planning.
What is Long Term Care?
When most people think of LTC, they typically picture a nursing home. It can also mean receiving care in an assisted living facility or a memory loss center. But increasingly, LTC also means getting the care you need while remaining in the comfort of your own home, and people are typically more open to this idea.
A need for care is usually evaluated by a doctor on your inability to perform at least two of the following six activities of daily living (ADLs) on your own:
- transferring (being able to walk or move yourself from a bed)
Separate from ADLs, severe cognitive impairment (e.g., Alzheimer’s or other forms of dementia) can also be the triggering event for an LTC need. Other conditions that may require LTC include a head injury, stroke, cancer, Parkinson’s, heart disease and Multiple Sclerosis.
Will You Need It?
Unless someone has had first-hand experience with LTC, it may be difficult to assess another's needs or understand its value. That being said, here are some credible stats on long-term care:
- 70% of Americans over 65 will need some type of LTC during their lives[i]
- 1 out of 7 people ages 65+ will need LTC for more than 5 years[ii]
- 1 in 9 people in the US age 65+ have Alzheimer’s dementia and 1 in 3 people age 85+ have it.
- People age 65+ survive an average of 4 to 8 years after diagnosis, yet some live as long as 20 years with it.
- At age 80, 75% of people w/ Alzheimer’s live in a nursing home.
- 1 in 3 seniors die with Alzheimer’s or another dementia, it is the 6th leading cause of death in the US.[iii]
With those types of odds, it is fairly risky to formulate your retirement plan while operating under the assumption that neither you nor your spouse will ever require any LTC. It can be insured against, self-funded or not funded, but that is a choice you will make during the planning process.
What Does It Cost?
If you need LTC, the cost can vary based on care setting, geographic location and the level of care required. The most widely quoted cost comparison tool in the industry is Genworth’s Annual Cost of Care Survey, which has been conducted for the past 17 years.
For the most recent survey done in 2020, Genworth contacted 57,981 providers by phone to complete 14,326 surveys of nursing homes, assisted living facilities, adult day health facilities and home care providers in all 50 states. Here is a summary of costs in 2020[iv]:
National (U.S.) Median Annual Costs
- In-Home Care (Home Health Aide): $54,912 (up 4.35% from 2019)
- Assisted Living Facility: $51,600 (up 6.15% from 2019)
- Nursing Home Private Room: $105,850 (up 3.57% from 2019)
Omaha, Nebraska Median Annual Costs
- In-Home Care (Home Health Aide): $59,488 (up 0.97% from 2019)
- Assisted Living Facility: $54,279 (up 13.08% from 2019)
- Nursing Home Private Room: $110,960 (up 19.69% from 2019)
It’s likely that Covid had some impact on the jump in costs over the past year. However, even just using a 3% rate of inflation going forward, the costs can quickly mount up. Running a projection for a 65-year-old, assuming $100,000 annual costs (in today’s dollars) for five years beginning at age 85 in 2041, the 1st year annual cost was $184,151, and the 5-year total cost was $979,637.
What about Medicare? Medicaid?
Medicare is the federal health insurance program designed mainly for people aged 65 and up. Generally, Medicare will only provide limited LTC support and only if you are receiving physical therapy or skilled nursing services in a “Medicare-certified nursing facility” after you had a hospital stay of at least three days.
If ALL of those conditions are met, Medicare will pay your costs for up to 20 days. After that, it will pay a portion of your costs for days 21-100, and then it pays nothing from day 101 and on. Medicare will pay nothing for assisted living or adult day services, and its benefits for in-home care are limited.
Medicaid is a joint federal and state public assistance program for financing health care for those with low incomes. Medicaid is the largest public payer of LTC services in the US. It will pay for certain health services and nursing home care for people with low incomes and limited assets.
To qualify for Medicaid, you may have to spend down your assets. Eligibility can vary by state. If you do qualify, there are restrictions on the type of care you can receive and where you can receive it. Whether the government will ultimately step in at some point to provide a greater amount of LTC benefit is an unknown but relying on that possibility is a risky approach.
Can You Self-Insure Against this Risk?
A big part of any financial plan is a retirement cash flow analysis. This is where I load up my client’s entire financial picture into our planning software and model out a projection of where their assets are headed over time. It’s trying to answer the questions, “when can I retire?” and “how much can I comfortably spend each year in retirement?”
Perhaps the biggest wildcard in this analysis is how to factor in potential LTC costs. If the client doesn’t have LTC insurance, I model out potential LTC costs being incurred down the road to see if the client has enough assets to withstand that type of additional expense. There have been times when I've run this analysis for a client and adding in LTC expenses turned what was a good-looking projection into a much riskier-looking picture. So, if you are planning on self-insuring for LTC, be sure to consult with your financial advisor.
The Checkered Past of LTC Insurance
Any comprehensive discussion on how to properly plan for LTC expenses should include a discussion of LTC insurance. And when discussing LTC insurance, there must be an acknowledgment that things haven’t always been great.
LTC insurance has been around since the late 1970s, though it didn’t really catch on until the late 1980s. The problem was that the insurance carriers didn’t really know what they were doing at the time with respect to LTC. Unlike life insurance and long-term disability insurance, which have long track records and actuaries that have a good understanding of claim experience and probability, with LTC, they were somewhat flying blind for a period of time. They made the mistake of treating LTC similar to life insurance. They assumed a larger number of people would let their policies lapse and that fewer people would actually go on claim.
It turned out over time the opposite was true (fewer lapses and more claims), which in turn meant that the insurance carriers drastically underpriced LTC policies from the start as their claim experience and exposure were much greater than they initially projected. LTC policies did not have guaranteed premiums. This meant the insurance carriers could go to each state’s insurance commissions and request rate increases, which were often granted based on their negative claims experiences. Many people who have older LTC policies have had to deal with multiple rate increases over the years.
What Insurance Products are Available Today?
LTC Insurance provides a pool of benefit dollars for LTC to be used when and where it may be needed. Important terms to consider are:
- the amount of inflation protection they provide,
- how many years of benefit and how much benefit are provided,
- your options on how to pay premiums (annually for life, over a set period of years, or lump sum), and
- whether you can share your benefits with a spouse.
Also, pay particular attention to whether the policy is a reimbursement or indemnity contract. With reimbursement, you only get paid a benefit if you qualify for a claim and prove you had a related LTC expense. With indemnity, once you qualify for a claim, you get paid your benefit regardless of what expenses are incurred, and you can use the funds however you want (although you will typically pay a higher premium for this right).
Keep in mind, if you have an existing cash value life insurance policy or annuity, you could potentially do a 1035 tax-free exchange to move those funds over to an LTC policy. For those with old life policies or annuities that are unsure what to do with them, this could be a great option.
Today, the available products fall into four general categories:
1. Traditional (Stand-Alone) LTC Policies
These are the original LTC policies previously discussed. You pay in a premium, and if you need LTC, it provides a tax-free benefit. It’s “use it or lose it,” meaning if you don’t need LTC, then you are out the premiums you paid in.
The premiums typically are not guaranteed, meaning the carrier can raise your rates in the future if it can justify that to the state insurance commissions. Carriers now have a better idea of how to price these policies from the start, so they would argue that it’s less likely for a newer policy to have increased rates in the future.
On the plus side, these policies are often cheaper on a relative basis compared to some of the other options below. So, it may be a better choice for those with smaller balance sheets or less disposable income.
These policies can often qualify for the Long-Term Care Partnership Program, which is a joint federal-state policy to promote the purchase of private LTC insurance. This program allows you to disregard any LTC insurance benefits you receive from the dollar amount of assets you would otherwise have to spend down to qualify for Medicaid.
2. Asset-Based Hybrid Life/LTC Policies
These are relatively newer products that have quickly gained in popularity and have become the top-selling LTC product in the market today. These often have a fixed one-time lump-sum premium payment. However, there are now options to pay in a fixed amount over a set number of years instead. Either way, the carrier can't increase your rates. It's also not use it or lose it. You will use the policy in one of three ways:
- Return of premium: If you decide in the future you want your money back, you just take back the cash you put in, usually as a tax-free return of premium; though there may be an initial period (e.g., 6 years) where you get something less than 100% of your money back (e.g., only 80%).
- Death benefit: If you die without needing the LTC benefits, your beneficiaries get a tax-free benefit that is typically equal to or even a little greater than the premium you paid in.
- LTC benefit: If you need LTC, the policy leverages up your premiums to provide a healthy amount of tax-free LTC benefit. For example, based on a recent illustration for a 70-year-old female, if they put in a one-time premium of $125,000, their day one LTC benefit was $305,000, but by age 85, that grows to $500,000. Down the road, the LTC benefit is over $600,000.
These asset-based policies can be a great option, particularly for someone who may otherwise already be sitting on a healthy amount of cash. In that case, it becomes an asset repositioning play. Meaning move cash from one pocket (your bank) where it's earning low-interest today over to another pocket (the hybrid LTC policy) where it's earning nothing but still available to you via return of premium and also providing a ton of leverage if needed for LTC. But know that you are typically paying a bit more for all that flexibility.
3. Life Insurance Policies w/ LTC Riders
These permanent life policies attach an LTC benefit to them but haven't been as popular as the asset-based policies described above. They typically provide a higher death benefit and less LTC coverage. So, if the focus is on LTC, they may not provide as much bang for your buck. I also hear these policies pay the agent higher commissions relative to the other options, so be mindful of that as well.
4. Annuities w/ LTC Riders
These are annuities that attach an LTC benefit to it. These could be an option if medical underwriting is otherwise an issue. It could also be an avenue to use an older existing annuity with tax-deferred growth and 1035 for tax-free LTC benefits. However, I would have similar questions about whether you are getting your bang for your buck if the primary concern is LTC.
The Hidden Risks of Self Insuring
Even if you are fortunate enough to self-insure against the risk of LTC, that isn't necessarily always the optimal approach. Some people may end up being very reluctant to spend down their assets later in life for LTC. While they may have ample assets to use for their own LTC, it can be human nature to want to preserve those assets for a spouse or leave for their kids' inheritance.
This can create a lot of tension within a family as the spouse or kids may need to provide the care for the other spouse who doesn't want to spend down their assets on help. If they had LTC insurance, on the other hand, those conversations get a lot easier if it becomes "hey, we paid into this policy, let's collect some tax-free dollars that we are entitled to and get you a little help."
Consult with Your Advisors
As you can see, evaluating how to handle LTC within a financial plan presents many challenges. There is no one size fits all answer here, so you need to think through your particular family situation and analyze all the options.
I would strongly encourage you to do so with a financial advisor and insurance agent knowledgeable on the subject to help you make an informed decision on what's best for your family. If you have any questions, please contact us.
[i] U.S. Department of Health and Human Services, National Clearinghouse for Long-Term Care Information, August 2016.
[ii] Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief, Judith Dey, February 2016.
[iii] 2021 Alzheimer’s Disease Facts and Figures, Alzheimer’s Association, https://www.alz.org/alzheimers-dementia/facts-figures
[iv] 2020 Genworth Cost of Care Survey, https://www.genworth.com/aging-and-you/finances/cost-of-care.html
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