Medical advances have
lengthened life expectancy, but as we live longer we will have physical and
mental incapacities that will require assistance with activities of daily
living (ADL). The six basic ADLs are: eating, bathing, dressing, toileting,
transferring (walking) and continence. Statistics
show that nearly 7-in-10 people who reach age 65 will need some form of
assistance with ADLs. Alzheimer’s and
other forms of dementia are the number one cause for claims in nursing homes.
Long-term care costs are
expensive, and there are a variety of ways in which people may receive
assistance. A private room in a nursing
home had a median annual cost of $91,250 in 2015; an assisted living facility
had a median annual cost of $43,200 in 2015; and home health aid services had a
median annual cost of $45,760 in 2015.
The average length of stay in a nursing home is three years. A longer stay can really increase the costs
to the family.
Many people in their late
40’s and 50’s have seen their own family members struggle with long-term care
decisions including how to pay for such care.
It is important to note that health insurance coverage, including
Medicare (which is Federal government health insurance for those age 65 and
above), do not cover the costs of long-term care (except that Medicare covers
100 days of skilled nursing care).
Medicaid (which is health insurance for the very poor, funded by a
partnership of Federal and State governments) does pay for nursing home care,
but you must be impoverished to receive the insurance. Long-term care costs are already high and
they increase every year. With respect
to paying long-term care expenses there are three basic approaches: paying the costs from your savings and
investments, paying the costs with long-term insurance, or relying on Medicaid.
When the Affordable Care
Act (a.k.a. Obamacare) was enacted, it included a provision called the Community
Living Assistance Services and Supports Act to pay long-term care expenses if
those enrolling in the coverage paid enough premiums to pay for all the expenses. The government quickly discovered that the
cost of care would far exceed the funding received from premiums and so the
provision was abandoned before it became effective. Recently, an article in
the New York Times addressed Medicaid funding issues and the payment of
long-term care expenses. The article
described the hard decision of whether someone should pay the premium costs of
buying long-term care insurance. The
author concluded that it would be foolish to pay for premiums because the
government will eventually come around to providing such coverage for
everyone. But this seems to be wishful
thinking and a very irresponsible conclusion to me, waiting for the government
to come to our rescue, when current entitlements are projected to run out of
money and overwhelm the fiscal budget!
For those with modest
assets of maybe several hundred thousand dollars or less, Medicaid planning may
be the best route. For those with more
wealth of up to $5 million or maybe even $10 million, long-term care insurance
may not actually be necessary to pay your costs, but the insurance could be
very effective in preserving your estate for your heirs. For those with more than $10 million,
self-funding may be the most appropriate approach.
The best time to apply for
long-term care insurance is probably before age 60. As we age we tend to have more health
problems which makes it harder to be accepted by the insurance company. Good health can save premium dollars with a
preferred health rating. Poor health
makes one uninsurable.
There are three basic
types of long-term care insurance. The
traditional policy where you pay annual premiums for pure long-term care
insurance. Many insurance companies have
abandoned these policies in recent years as their actuarial assumptions
understated the cost of providing the insurance. The other two types of policies are hybrid
plans, one combining long-term care insurance with an income annuity and the
other combining it with life insurance.
The hybrid policies tend to have higher premiums because the policies
provide annuity or life insurance benefits in addition to the long-term care
insurance. Hybrid premiums are typically
paid as a single premium or as a fixed payment over a period of time such as 10
years. However, the hybrid policies may
have less restrictive underwriting, the premiums usually won’t increase, and
your heirs may receive money back if long-term care benefits aren’t used (the
premiums are in effect returned by a death benefit). Hybrid policies may also be surrendered for a
return of some or all the premiums if you decide not to continue the policy,
whereas premiums paid in a traditional policy are not recoverable.
Two decisions must be
made: 1) whether to self-fund or
purchase long-term care insurance, and 2) if insurance will be purchased, what
type of policy should be purchased. The
answers depend upon your circumstances and you will be well served to be
advised by someone knowledgeable in this area.
It is easy to procrastinate making these tough decisions and to find
yourself in an endless analytical loop.
You must press forward until reaching a decision that makes the most
sense for you. Otherwise, a failure to
plan will leave you exposed to future circumstances.
