Most affluent people opt out of long-term care insurance, assuming they can cover the cost of any future health care needs. Still, between increasing life expectancy and the rising costs of nursing homes and home health care, long-term care insurance can be an important financial planning tool. Perhaps more important, early preparation may help alleviate the emotional burden of issues down the road, for both you and your loved ones.
What Is Long-Term Care?
Long-term care refers to a broad range of personal assistance services that aren’t covered by either health insurance or Medicare.
“Most care doesn’t happen in facilities. It happens in the community and at home,” says Peter Wetzel, president of American Medical Claims, a company that helps people receive insurance reimbursements. And as people are living longer and leading fairly independent lifestyles, they’ll increasingly need some assistance at home, whether due to an accident, illness or the aging process.
A long-term health condition can take a toll in unexpected ways. More than a third of family caregivers in 2007 quit their jobs to care for loved ones, according to AARP. “You can’t project what the needs will be because life is full of surprises,” says National Family Caregivers Association communications director Deborah Halpern. More and more, people in their 50s and 60s are experiencing what it takes to care for their parents, which may help them plan for their own futures. “If they’re paying out of pocket for their parents, they may not want their children to be in that position,” Halpern says.
Sometimes, it’s the children who opt to buy long-term care coverage for their parents — a choice Jacqueline Marcell, a former TV executive, wishes she had made. Her father was caring for her mother, who had Alzheimer’s, in San Francisco. When he began to suffer from dementia, Marcell left her home in southern California. “I hadn’t planned on moving in, but I got there and the situation was so horrific that I had to stay,” says Marcell, who wrote a book, Elder Rage, based on her experiences.
For the next five years, her life was put on hold while she navigated the situation, eventually hiring around-the-clock care. Like many, she was unaware that Medicaid was limited to services in a nursing home, or what taking care of her parents would entail. Today, she believes that having long-term care insurance could have saved her parents’ life savings and most of her own, as well as a lot of emotional distress.
The aging baby boomer generation is posing a growing challenge. The number of older Americans is expected to reach 70 million by 2030. By 2020, it’s estimated that 12 million older Americans will need long-term care, according to the American Medical Association.
Moreover, the responsibility of caring for the elderly tends to fall on family and friends. The assistance they provide is worth approximately $375 billion, according to the National Family Caregivers Association.
A range of professional services could be needed for long-term care. Consider that the average cost of care in a nursing home is between $70,000 and $75,000 per year, and the cost for a certified aide at home averages $35 an hour. These costs add up if you consider that, on average, a typical person who enters a nursing home stays two and a half years. And treating a chronic illness at home can cost much more, requiring professional care seven days a week.
In addition to offsetting some of that financial risk, experts view long-term care insurance as a means of helping family members supervise the care. “The real risk is to the family because of the physical and emotional stress that the need for assistance can cause,” Wetzel says. “Long-term care insurance basically buys peace of mind.”
Who Benefits From Long-Term Care Insurance?
Determining whether long-term care insurance is right for you requires balancing a whole range of factors. First, consider the following: Do you have a family history of chronic illness? And where do you plan to retire? If you’re headed for New England, for example, keep in mind that the cost of nursing homes there is twice that in other regions.
According to Frank Bond, a senior financial consultant at Northern Trust, people with assets between $500,000 and $5 million stand to benefit the most from long-term care insurance — although he’d recommend it for wealthier clients, as well.
“If there’s a real risk out there and you can share that risk cost-effectively, why wouldn’t you do it?” he asks. “You’re more likely to collect on long-term care insurance than you are on home or auto insurance.”
And there are other potential incentives. Certain income tax deductions are allowed for some long-term care expenses and insurance premiums. Meanwhile, many states are reducing funding for long-term care services to help balance their budgets.
To be sure, long-term care insurance isn’t for everyone. The high cost of premiums dissuades much of the population. Another downside is availability — many people don’t qualify for the insurance. And it’s difficult to anticipate future needs. A plan with built-in inflation adjustments is one way to offset that concern. According to a 2009 report by the Kaiser Commission on Medicaid and the Uninsured, purchasers tend to “buy a substantial amount of comprehensive coverage and protect it aggressively against inflation.”
In fact, people are increasingly buying into plans at a younger age. One benefit of doing so is that you lock into the premium at the age you sign on, but can add coverage later. A typical premium for a 60-year-old couple is $3,096; at 70, that same premium has nearly doubled, according to the Commission’s report.
Those figures may seem pricey, but one year of care could outweigh 20 years of premiums. “Wealthy people don’t get average care,” Wetzel says. “They’re going to go into a much nicer facility [or] pay more for better care at home.”
Long-term care insurance is also viewed as a tool for protecting your wealth, so that you can later transfer it to a child or charitable organization. “Affluent people who engage in sophisticated planning so they don’t spend their own assets make prime candidates for long-term care insurance,” Bond says. While those with more than $5 million can probably self-insure, he still recommends long-term care insurance to lessen that risk.
Before making any decisions, consider how long-term care services could affect your finances. How might your expenses be affected by a chronic illness? On the other hand, if your premiums would consume 10% or more of your expected retirement income, it may not be worth it.
Discussing Long-Term Care
Long-term care insurance plans are complicated, and you may benefit from having an advisor walk you through your options. In addition, discussing long-term care isn’t easy, and families may be confused over the best solutions for care.
“When you buy the coverage, you buy the insurance company’s expertise,” Bond says. “But it’s also a way to give your children permission to spend the money to get you good care.”