Throughout our time as planners, Anthony and I have heard hundreds of stories of our own clients and their families facing the perilous waters of aging. However, this has not been limited to our professional life. We have faced the enormous cost and emotional difficulties of long term care in our own family. I had a grandfather who lived several years in a nursing home, eating away several hundred thousand dollars of his own wealth. My husband became the chief caretaker for his disabled brother and father for well over 5 years, having to fight Medicare for benefits and coping with the emotional trials and tribulations of such care.
In this article, we will walk through some eye-opening statistics regarding long term care, the (lack of) assistance from the government in meeting these expenses, and finally discuss some methods for how you can meet these expenses in retirement.
An Objective View of Long Term Care
No one ever thinks it will be them. When you are young, a feeling of indestructibility is pervasive. However, the numbers do not bear this out. More than 70 percent of Americans over the age of 65 will need long-term care services at some point in their lives, according to a study by the U.S. Department of Health and Human Services. If that doesn’t open eyes, consider the following HHS statistic: Anyone reaching the age of 65 years has a 40 percent chance of entering a nursing home, with a 20 percent chance of staying there for at least five years.
If we break down the numbers even further, women are higher at risk. Based on a study cited by the WSJ, 79% of women who reach the age of 65 will need some level of care, with an average of 3.7 years of care. While males do not carry the level of risk as females, men still have a very high level of risk – 58% of men will need some level of care, with an average of 2.3 years.
In terms of the cost of care, the numbers can be eye-widening. Based on the 2015 Genworth LTC Cost of Care study, the average cost per day for home healthcare is $160 growing at 1.32% over the past 5 years (for only 8 hours of care per day), while average assisted living costs $300 per day growing at 2.48% over the past 5 years, and average nursing home (private room) costs $250 per day growing at 3.95% per year.
If we extrapolate out the average cost with the average length of care, the cost for women for home healthcare is $216,000, $405,000 for assisted living, and $337,000 for a nursing home. The cost for men for home healthcare is $134,000, $251,000 for assisted living and $210,000 for a nursing home. And these figures are just averages – what if you need 24 hour in home healthcare? Triple the $216,000/$134,000 figures above for women/men. A high end nursing home in Manhattan? You can double or triple the average nursing home cost. If you have Alzheimer’s or Parkinson’s and require care for a significant period of time, we could potentially be talking $1m+.
Just like most other things in life, if you have the means to personally pay for long term care (and do not want to go the Medicaid or insurance route), you can simply consider paying for long term care yourself. But given how expensive it can get (and how quickly this can happen even for a short stay), this really is not an option for most people. Even if you do have the option, it may not be the best option available.
The Long Term Care Myth
Many individuals that meet with us initially believe that the government will pick up the tab if they need care, and unfortunately, this is not entirely true. Medicare will only pay for a limited period of time; if you have met the following conditions, Medicare will pay for a tiny period of care:
- You have had a recent prior hospital stay of at least three days
- You are admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay
- You need skilled care, such as skilled nursing services, physical therapy, or other types of therapy
If you meet all these conditions, Medicare will pay for some of your costs for up to 100 days. For the first 20 days, Medicare pays 100 percent of your costs. For days 21 through 100, you pay your own expenses up to $157 per day (as of 2015), and Medicare pays any balance. You pay 100 percent of costs for each day you stay in a skilled nursing facility after day 100. I would note that it is not a “slam dunk” that you will even qualify – the above 3 requirements are very stringent and you may end up fighting the government to get even this short term coverage (my husband had this happen with his brother just a couple of years ago).
I am sure you are thinking, what about if you need care beyond the first 100 days? The government will cover your stay through Medicaid, but you must meet requirements that are not entirely palatable. The rules for meeting the Medicaid requirements vary from state to state, and can be very complex – we have simplified the 2015 rules below in Illinois.
First, you must meet the income requirements; Medicaid in IL requires you to pay all but $30 in your monthly income to the state in order to qualify (or, if you have a spouse who is not on Medicaid, such spouse can keep ~$3,000 of the qualifying Medicaid recipient’s income for their own living expenses). Next, the government requires you to “spend down” all of your assets in order to qualify (or if you have a spouse, such spouse can keep ~$120,000 in assets and your home, along with a car, household furnishings, etc.). Thus, your spouse may be in jeopardy financially if this “spend down” occurs.
Even if you do in fact qualify, and you spend down all of your assets and given away all of your income, you can only move into a “Medicaid accepted” long term care facility (either assisted living/nursing). This would preclude you from moving into many of the better facilities in your state, as many (but certainly not all) of the best facilities do not accept Medicaid patients. You may also be required to share a room with another Medicaid patient. If you desire to have healthcare in your home, Medicaid can provide some minimal benefits, but you will not have the full access of medical/personal care that you would receive if you paid out of pocket or had long term care insurance.
Long Term Care Insurance
Just like there is protection against a premature death with life insurance and income protection against disability through disability insurance, there is private insurance that will protect you and your loved one’s assets against a catastrophic long term care event. There are a host of different types of products available for clients nowadays, but I am going to highlight just a couple of them.
The first option that you are probably aware of is traditional long term care insurance, which will provide an inflation protected monthly benefit for a certain number of years, and will cover the four main types of long term care – nursing home, assisted living, home healthcare and adult day care. These policies “spring” into action when you cannot meet 2 of the 6 activities of daily living (eating, bathing, dressing, toileting, transferring (walking) and continence) on your own, as certified from an independent doctor (not affiliated with the insurance company). There are of course drawbacks of such insurance – the annual premium may increase (if the state department of insurance agrees to such increase), and if you do not make use of the policy prior to the policyholder’s death, you lose the premiums you have put into the policy over the years. However, this type of policy has premiums that are reasonable in nature and provide the necessary protection so that if there is a catastrophic long term care event, the client is adequately protected, as is their spouse.
The second option is what is known as a linked benefit life/LTC policy. With this type of policy, you will receive a certain amount of long term care protection which looks very similar to traditional long term care insurance (inflation protected monthly benefit, covers the four main types of care, etc.). The long term care pool, which represents the amount of total benefits the policy will pay to the policyholder if there is a long term care need, will depend on the specific policy. There are some policies that “ratchet up” the long term care pool over time, there are other policies that pay out a multiple of your death benefit, etc. The main difference is, unlike traditional long term care insurance, your beneficiary will receive a death benefit if you do not make use of the policy. How this death benefit is structured, again, differs from policy to policy. It may stay at a flat amount, it could also start out higher and decrease over time, etc. Thus, if you never need the care, you will receive some form of premium return to your loved ones – this can be contrasted with traditional long term care insurance, whereby your heirs get nothing back if you do not utilize the policy. This policy is also a fantastic option since you either put in a single lump sum or pay a set premium over 10 years, thus you do not have to worry about a premium increase. The rub of this type of policy is its significant upfront cost, but if you can afford it, this policy makes perfect sense.
We have gone over quite a bit of information in this article, and I know that this is a very complex area of our business. If you have any questions, please do feel free to reach out to Anthony or I.
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.