If you or a parent are over the age of 50, it is time to consider what your long term care plan is. When I refer to long term care in this post, I'm talking about what happens when someone's health deteriorates to the point where they need extra care. In technical terms, this is when someone cannot perform a certain number of "activities of daily living" or ADLs: bathing, dressing, walking, transferring, toileting, eating and maintaining continence. Typically, this is when someone would enter a nursing home or some type of assisted living facility.
This is not an easy topic to discuss for a number of reasons. First, predicting when you'll die or how severe your health ailments will be over the next 20 years is nearly impossible. Second, the financial implications can range significantly depending on many factors. Finally, having the conversation within the family can prove to be very uncomfortable and is usually avoided. While a parent may believe that their child would care for them under any circumstance, the child may assume that their parent has the financial means to put a long term care plan in place. Since the child may have their hands full raising children of their own while working full time, they may not be willing or capable of caring for an elderly parent.
On that last point, this is why I have seen those in their 30's and 40's referred to as the "Sandwich Generation" since they will be responsible for raising their own children while caring for their aging parents. Many incorrectly assume that Medicare would step in and pick up the financial tab in all situations, but I'm here to outline exactly what you might want to expect should you take no action.
I will broadly cover the long term care topic in this post. For further reading, I would suggest reading the "Planning For Long Term Care in Massachusetts" guide.
What Are the Odds I Will Need Long Term Care?
Many feel that their children would care for them in a time of need. My question for those people: how will care affect the family? Who will change your diapers or bathe you? Who will be quitting their job to do this full time? Do your children currently live close enough to do this, or have an extra room in their house for you? If you have no plan in place, your family could get into arguments, especially if one of three children has to shoulder most of the time and/or financial burden for your care.
Recent studies based upon nursing home admissions indicate that at least 43 percent of all persons aged 65 and over will enter a nursing home in the future. Thus, for a married couple, this is an important topic. Since there is a good chance one of you will need care and the other will be unable to physically provide that care, a financial plan must be put into place.
Of those who entered nursing homes, 50 percent stay an average of two years. Roughly 47 percent of all nursing home residents have chronic illnesses which are ongoing, long lasting and not likely to subside. These include Alzheimer's, senile dementia, immune system dysfunctions, and a host of slowly progressive illnesses that simply do not get better.
When Will Medicare Or Medicaid Pay?
Medicare covers up to 100 days of skilled nursing confinement per benefit period only after a beneficiary has had an inpatient hospital stay of at least three days. However, after 20 days, beneficiaries must pay a coinsurance amount. In 2017, this is $164.50 per day (a cost of $13,160 for the 80 days). After day 100, all costs are on the beneficiaries.
Medicaid supports about 70 percent of all nursing home residents at least in part. Keep in mind that Medicaid is only available to those who have no assets left. The technical definition allows you to have a home and one car, but you cannot have over $2,000 worth of assets to qualify for Medicaid.
There have been movements in the past by families to give away their assets in order to qualify for Medicaid. There are two things I want to caution you about with this strategy.
First, there is a five year look back period where Medicaid will consider any assets gifted or sold for under fair market value against you. This includes placing assets into an irrevocable trust. If they see these assets, you will be ineligible for Medicaid for a certain number of months.
Second, consider how burdened long term care facilities are going to be as the thousands of baby boomers retire and need care. Some have referred to Medicaid nursing facilities as "sit and drool" facilities. The implication is that the "tenants" are given medications to make them lethargic and easier to care for due to their overpopulation. While some may have no other choice, others with the financial means may want to consider more attentive and proper care.
How Much Will Long Term Care Cost?
This 2015 Genworth study will give you an idea of how expensive your options can get. Here are the average Massachusetts numbers by annual cost (click the link for some more accurate rates by region):
Home Health Aide: $57,200
Adult Day Health Care: $16,900
Assisted Living Facility: $63,600
Nursing Home Semi-Private Room: $128,845
Nursing Home Private Room: $139,580
It would be prudent to budget at least 20-30% higher than these numbers. If you have been living on six figure expenses your whole life, it's unlikely that you will want to settle for "average" care.
Who Should Get Long Term Care Insurance?
If you are between the ages of 50 and 65 and have significant assets, long term care insurance should be on your radar. I would define this as having over $500,000 of investable assets. If you are under that amount, chances are you will be spending down your assets in retirement to the point where you will qualify for Medicaid. In this case, you do not need long term care insurance.
How about those who have saved enough for retirement and could handle a long term care expense? Let's define this group as those who have over $3 million in investable assets. There is a strong case that this group could "self insure" and avoid having a policy. However, many wealthy individuals still buy a policy. Even though they could afford $300,000 in expenses, they realize that it will be their children making their health care decisions should they become incapacitated. Thus, if that child is relying on their future inheritance to fund the nursing home expense, they might be more frugal with the money. A policy with a small annual premium will insure that a pot of money is set aside for this very reason.
Other wealthy individuals may simply want control of their assets. By buying a policy, they won't be forced to sell their business, investment real estate, or stocks at an inopportune time. They can go about managing their retirement assets knowing that the long term care policy gives them a safety net to rely on.
Those who are between the $500,000 and $3 million range should make a financial plan and run several worst case scenarios. If your living expenses are low or if you have a significant pension coming your way, there could be a scenario where your assets will grow fast enough to handle any long term care expense. However, even if that is the case, paying the annual premium on a policy will allow you to use your other assets for whatever retirement expense you like, bringing you peace of mind.
If you decide to self-insure, it would be wise to set aside an account that is specifically earmarked for long term care costs. This could be around $200,000 for a married couple, invested in a moderate portfolio. You would not include this account in any retirement projections or college savings plans.
How Much Does Long Term Care Insurance Cost?
If you can obtain a group policy through your employer, costs could be under $2,000 per year while the medical underwriting requirements could be much more relaxed- just be sure you are reading over what benefits you have (discussed in the next section).
Policies for a married couple can range between $2,500 and $5,000 per year, depending on the age you apply, your health, and the benefits you ask for.
What Provisions Should I Consider?
Certainly, every situation varies. Having said that, most should consider using an elimination period of 90 days since Medicare will cover at least a portion of your care for the first 100 days. An elimination period is the amount of time you are on your own until the policy kicks in. If you used an elimination period of 180 days, your premium would be less each month but you would need to have more cash ready to go in an emergency fund.
You should also be adding an inflation rider. As seen in the above Genworth study, the costs of care can rise up to 6% per year! Thus, you don't want to buy a total benefit of $100,000 as a 55 year old with no inflation rider. By the time you reach your 80's, $100,000 simply will not buy you much. I would recommend starting with a 3% compound lifetime inflation rider. Most policies will allow for a "buy up option" which allows you to purchase more care in the future.
With the average nursing home stay at two years, you would be wise to choose a benefit duration of at least that time frame. With home health aide and assisted living facilities hovering around that $60,000 per year cost, a policy limit of $120,000 is common. If you would prefer a private room in a nursing room, your policy limit may need to be upwards of $300,000. This may or may not be possible, as some policies will limit their monthly reimbursement benefit.
Putting A Plan Together
If you have made it this far, you are light years ahead of most. There is no right or wrong answer as it all will depend on your health, family dynamics, and finances. The point of this post is to shine a light on a topic nobody likes discussing. Unfortunately, with money being such a taboo issue to discuss between parents and children, many will find themselves unprepared during the toughest of times. I would recommend finding an advisor that you trust that can help look at your situation objectively and guiding you to a path that will bring you peace of mind through retirement.