Think You Won't Need Long Term Care?
Volume 17, Issue 13
What you’ll read in this report:
- Only a small percentage of Americans have long-term care insurance
- The benefits of a well-thought-out and fully funded extended care plan
- A formula for a reliable and affordable financial solution for extended care outlays
- The “Major Medical” approach to long-term care insurance
AARP: 70 Percent of People Over Age 65 Will Need Long-Term Care Assistance
When the topic of long-term care arises, some people have the attitude that “it won’t happen to me.” According to AARP, about 70 percent of people over the age of 65 will need some type of long-term care assistance during retirement.
Many people need help with bathing, dressing, cooking and other daily activities when they become frail. We know that Baby Boomers are turning 65 at the rate of 10,000 a day, according to the Social Security Administration. The rate the population is aging brings a greater need for ever-increasing extended care services. Only about 8.1 million Americans (out of 326 million total) have long-term care insurance to help pay for assistance with daily activities at home or in assisted living facilities, according to the American Association for Long-Term Care Insurance.
Ideally, everyone has a financial plan that is designed to achieve their retirement income and estate transfer goals. That plan is funded with assets which will have the specific goal of generating income to secure financial commitments in retirement. So it is critical to ask a few questions during the planning process:
- “What is important to me?”
- “What responsibilities do I have to others?”
- “How might the costs of extended care jeopardize my commitments to others?”
- Cash flow is jeopardized.
- Tax planning will be impacted.
- Time to wait out stock market corrections will be affected.
- Special needs of other family members will be disrupted.
- A surviving spouse’s financial security will be affected.
- Self-funding from savings for a fixed period of time;
- A traditional long-term care policy with a long front-end waiting period before benefits kick in; and
- A permanent or hybrid life insurance policy.
Health impairments can be physical, cognitive or both. The failure to have a plan for extended care will have substantial consequences to the emotional, physical, and financial well-being of you and your family during retirement.
Consider Mary, a 50-year-old single nurse, who lives by herself in a city that is 150 miles away from her elderly parents. Every week Mary drives to her parents’ home on Monday morning, and when she arrives, proceeds to do whatever is needed to take care of her home-bound parents.
Her mother, Jane, is bedridden due to a stroke she suffered several years ago that partially paralyzed her. Her dad, Bill, was reasonably healthy until a year ago when he suffered a heart attack. He can no longer get around on his own and had to stop driving the car.
There is an assisted care facility in the small community where Jane and Bill live. However, the $9,000 per month cost is unaffordable. More importantly, Bill and Jane want to stay in their home as long as possible.
Mary has a brother and sister that live in the same town as their parents, but they are not able to help very much. Her brother, Rob, is working hard to keep his small contracting business going and has two young children. Mary’s sister, Ruth, is divorced, works in an office, and has two children still in grade school.
Mary assumed the primary responsibility for her parents’ care, because she was able to rearrange her work schedule at the hospital to work in the emergency room Friday through Sunday. Mary has no personal life of her own and is feeling the stress of working 24/7 either at the hospital or caring for her parents.
Unfortunately, the tension between Mary and her siblings is increasing and it is harder and harder for everyone to get together to talk. Mary wonders during her long commutes, “How long will I be able to keep this routine up?”
Providing care to chronically ill people may make the caregiver chronically ill. Often, an adult child is forced to put his/her life aside, creating its own set of consequences. Relationships with the family suffer, and sibling relationships become strained, which means providing care doesn’t bring families together; it tears them apart.
Paying for extended care impacts your goal of securing financial viability. It is important to remember that we live in a world of cash flow, not just assets.
Paying for care requires a reallocation of income and assets which means that by definition, every plan you have established to provide for a secure retirement is disrupted:
When the consequences are so dire for not having a funded plan for extended care in place, why is it that most people do nothing about it?
Many people simply do not understand the impact long-term care has on their family and their financial plan. And, even if they do, where does one go confidently to get competent advice? Many times people have to be persistent to get sound advice. It’s even harder to find a suitable insurance product; so self-insuring the cost becomes the solution by default.
Three Steps For a Successful Extended Care Plan
Let me suggest three steps to creating a successful extended care plan.
Step 1: Identify the current and future commitments that you are responsible for and identify what the possible consequences will be if your responsibilities are not met.
Step 2: Understand that no social program will pay extended care. Medicare generally does not cover long-term care. Medicare can provide some health insurance benefits, but does not pay for home care. Medicaid is only needs-based and pays for nursing home institutional care, only after you spend or protect most of your assets. The Veterans Administration only provides health care benefits, not extended care benefits.
Step 3: Know and understand that assets do not pay for extended care. Income pays for this care. Fund your plan with insurance. Insurance, when properly arranged, provides a stream of income to fund the plan.
The benefits of a well thought-out and fully funded extended care plan include the following:
A family member can supervise the care rather than provide the care that is needed for individuals who cannot function on their own.
Family members who need help with daily activities can stay in their own home for a longer period of time, if that is what is desired.
Adult children’s relationships are kept together because a funded plan reduces the amount of stress that may otherwise incur.
Investment dollars that were earmarked for a specific purpose can be left alone to reach that goal.
Without appropriate planning for extended care, the caregiver can face significant emotional and physical burdens, along with the family’s financial security being disrupted.
Solving the Long-Term Care Puzzle
With longer life spans and ever-increasing costs of extended care services, the Baby Boomer population will need to be much more innovative than their parents were in finding ways to fund these outlays.
To make matters worse, Boomers need to plan not only for their own future needs, but also make certain their parents’ extended care finances are in order. In 1994, the Pennsylvania Supreme Court ruled that an indigent mother could sue her adult son to pay her overdue nursing home bills. Ever since this case, Savoy vs. Savoy, became law, filial support litigation has been spreading across the nation. Currently 28 states have filial support laws on the books. These laws establish a legal precedent of financial responsibility among family members for expenses incurred by a loved one.
There are many options available to fund extended care, but as mentioned in my prior report social, government-funded programs are not one of them.
What we are finding is that a combination of the following can provide a reliable and affordable solution for extended care outlays:
1. Determine how much of the extended care cost you are willing to pay for out-of-pocket without insurance. Can you allocate enough of your savings and investments to pay for three months, six months, nine months or even one full year of extended care services? At $4,500 per month, as a benchmark rate for an assisted care facility, that comes to $108,000 for both spouses for one year.
An extremely important, and often overlooked, factor in determining how much one can afford towards the payment of extended care services is income taxes. University professionals have the majority of their savings in retirement plans. These plans were funded with pre-income tax contributions that accumulated over many years on a tax-deferred basis.
It is not uncommon for people who are planning their retirement income to underestimate the amount of income taxes that will need to be withheld from plan distributions. The highest marginal federal income tax rate is now at 40 percent. In the example above, income taxes were not factored into the calculation. To net $4,500 per month from a pre-tax retirement plan, an additional 15 percent to 40 percent or more will need to be withdrawn from the plan for income taxes.
Of course there may be other expenses that could substantially increase this total, but as a starting point, if you can budget one year of extended care expenses from savings, the premium on a traditional long-term care policy will decrease substantially.
2. Consider traditional long-term care insurance. Carefully scrutinize the companies, and choose from among the two or three highest-rated carriers.
Years ago insurance companies jumped on the bandwagon and offered long-term-care policies with little or no experience. Many of these companies found out that they did not understand the business and got out of it or increased the premiums to an unaffordable level. Premiums today are not guaranteed and can be increased.
To keep premiums down, consider a long-term care policy with a one year waiting period instead of a 30-day, 90-day or even six-month wait. Be sure to have a home health care benefit, as well as a cost-of-living rider on the policy. Consider a payout period longer than three or four years. The incremental premium expense to go from a three-year benefit to a 10-year, 15-year, or even a lifetime benefit period is less than you might expect. If insurability is a factor, consider employer sponsored long-term care insurance.
Some employers are beginning to offer “group” long-term care policies to their employees. These employer sponsored plans may sometimes have discounted rates and offer a certain amount of coverage without the applicant having to go through medical underwriting. This can be a valuable option in cases where an applicant has a medical history that would prevent qualification for coverage under normal industry guidelines.
Again, consider self-insurance when reviewing the monthly benefit amount. Can you self-insure from your investments for a portion of the monthly benefit? If you can pay out-of-pocket $1,000 per month, with the policy providing $3,500 per month of benefit, that will keep the premium down. We call this approach, “The Major Medical” approach to long-term care insurance. Self-insure up front for a fixed amount, and when possible, self-insure a fraction of the monthly benefit amount.
3. To complete the funding for extended care, consider permanent life insurance. Life insurance is being used by more and more people to help fund long-term care expenses. Individual permanent life insurance has a guaranteed premium that will not increase. Group life insurance that is offered through your employer is an employee benefit. As with other employee benefit plans, it ends when you leave your job or shortly thereafter, so it is not the best solution.
Individual permanent life insurance is portable, but more importantly, will stay in force until the insured dies. In other words, the insurance policy’s death benefit is guaranteed to be distributed at some point in the future.
This is a major difference and sticking point with traditional long-term care policies. The insured under a long-term care policy may never go into an assisted care facility or nursing home, and end up paying for coverage that was not used.
One of the major benefits of permanent life insurance is that, once in force, premiums cannot be increased. In some cases, the premium may actually go down over time.
A number of life insurance companies offer advanced benefit riders that are fairly inexpensive additions. These riders allow for a portion of the insurance death benefits (often up to 90 percent) to be paid in advance if the funds are needed for long-term care.
The insurance death benefit can be designed to increase over time without an increase in premiums. This can be another great way to protect against the ever-increasing costs of extended care. Unlike traditional long term care policies, if the policy is not needed for extended care, it can be surrendered with a cash distribution.
The alternatives for an effective mix of self-funding, traditional long-term care insurance and permanent life insurance go beyond the scope of this report. The good news is that with careful planning and design, a suitable combination of these innovative solutions will help you solve your long-term care funding puzzle.
By Michael J. Filbrandt, CLU®, ChFC®, Chairman of the Board, Filbrandt & Company
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