WHAT YOU NEED TO KNOW ABOUT THE RISKS & ROLE OF INSURANCE
Concerns about long-term care typically increase over time, with many beginning to focus on this type of planning in their 50s or early 60s. Younger people, however, may investigate long-term care planning on behalf of their parents or parents-in-law.
A Significant Long-Term Cost
Most of us are aware of the medical reasons people need long-term care services. Very simply, as we age, basic daily functions (called Activities of Daily Living or “ADLs”) can become difficult to perform without assistance. ADLs include Eating, Bathing, Dressing, Toileting, Transferring, and Continence.
Assistance with such activities, whether in a nursing home, in a skilled nursing facility or even at home, can be very expensive and the need for assistance may last for years. In fact, the yearly cost for full nursing home care can be $100,000 or more. Thus, for both family and financial reasons, giving careful thought to these challenges in advance of a long-term care need is wise.
A few questions individuals and families should consider:
- What would you do if you were suddenly faced with an additional yearly expense of $100,000 (much higher in New York, California, and other expensive states)? Also consider that this amount will double if a couple needs care simultaneously.
- How would this affect your retirement planning?
- How long could you afford these costs?
- How would this additional expense affect the estate you want to leave behind?
- How can you assure that you maintain your financial security and independence?
- How would you answer these questions with respect to your parents or in-laws?
Family members as care providers
While siblings, children, grandchildren and farther-removed family members can play an important role in providing care, there are a myriad of issues to consider, including time management, geography and funding. Challenges can arise if some family members live near the person needing care and others do not. Will all geographically close relatives split duties equally? Will some be compensated for their time and at what rate? Can family members do a good job of providing care? Even in the best of circumstances, these are issues that can build resentment, anger and stress, and can often lead to serious repercussions throughout the family.
Generally, the government will pay for long-term care as part of the Medicaid program, but only after the care recipient meets certain state-specific income, asset and physical minimums. In other words, you must be poor by state standards before the government will assist under the Medicaid program, and the assistance will likely be provided in a nursing home. For most physicians and other high-net-worth individuals, meeting these minimums would mean losing most of the assets they have worked hard to earn over their careers – an unacceptable proposition. However, Medicaid qualification may be a suitable solution for aging parents in some families. With advance planning, the use of Medicaid trusts and other tools to qualify for benefits by moving assets to family members can be a viable option that should be explored.
Paying out of pocket
Certainly, some can afford to pay out of pocket for months, if not years, of services for themselves and their spouses. But, is this a wise choice from an overall financial planning perspective? It may not be, especially when insurance coverage is considered (see below).
Even more problematic may be paying out of pocket for parents or in-laws, especially when other siblings do not have the ability or desire to pay their fair share.
Purchasing insurance to cover long-term care needs can be a sound part of a financial plan. Long-term care (LTC) insurance is an insurance product which pays for long-term care services in many settings, such as at home, in a nursing home, assisted living facility, or adult day care facility. Since there are many different LTC insurance plans and insurance carriers who offer them, it is important to work with an insurance expert to make sure the plan you select will meet your foreseeable needs.
Two Leading Categories of LTC Policies
- Traditional LTC policies
Traditional LTC policies feature benefits, options, and riders that vary in availability and scope among carriers. These traditional policies do not have cash value, nor do they have a death benefit. Once a person becomes eligible for LTCI benefits (by becoming unable to perform two of six ADLs), the traditional policy pays a daily or monthly reimbursement for approved expenses up to the maximum daily/monthly benefit chosen by the insured. Upper and lower limits vary among carriers but are in the $20–$300 per day range. Benefits can be received for a specified period of time, usually two to six years, as determined by a total insurance dollar value of the policy, often referred to as the “pool of benefits.” “Facility-only” or “facility and in-home care” policies are also available. Elimination periods (deductibles) apply and can range from 0 days to 90 days.
Other features, options, and riders that vary among carriers are inflation protection, bed reservations, alternative plan of care, restoration of benefits, personal care advisor, respite care, joint policy discounts, premium waiver, rate classes, non-forfeiture benefits, indemnity benefits, and caregiver indemnity benefits.
- Universal life insurance policies
A different method of addressing long-term care needs is to purchase a universal life insurance policy with an attached rider that can accelerate all or a portion of the death benefit for payment of approved long-term care costs should the need arise. Benefits are received in much the same way as under a traditional LTC policy. In most cases, an existing cash value policy can be exchanged for a universal life insurance policy with no tax consequence (consult your tax professional regarding your particular situation).
The monthly benefit amount is selected as a percentage of the death benefit, with the most common being 2% (but there are also options available that can go as high as 4%). As you use the benefit for LTC expenses, the death benefit will be reduced dollar for dollar and any cash value is typically reduced proportionally. This strategy can use many different product types, including lifetime guarantees on the death benefit and premium payments.
Because long-term care planning will impact nearly every family in some way, it is wise to proactively examine options for you and family members before the need for care arises.