The Moving Parts Involved with Long Term Care

Our financial lives can get pretty complicated, pretty quickly.  If we were to sit down and draw on a piece of paper a box for each financial topic, then draw lines to connect how the topics touch each other, we would see a jumbled mess very quickly.  For example:  investments interrelate with taxes; taxes interrelate with retirement savings; retirement savings interrelate with college savings; college savings interrelates with income & cash flow; cash flow interrelates with insurance; insurance interrelates to estate planning; estate planning interrelates to investments…..

And those are just the one-to-one relationships.  We could certainly take each one of these topics and make the case that it “touches” every other in some form or fashion.

But there’s been another development over the last few decades that most people consider to be good news:  medical advances and better lifestyle choices mean we are living longer.  The not-so-silver lining to this however, is that this longevity has thrown a monkey wrench into this interrelationship of our finances, adding another topic that I believe sits right up there on the priority list.  From the title of the article, you already know I’m talking about long term care.

In short, I believe long term care is as complicated and interrelating a financial topic as any of those big ones I already mentioned. Financing long term care impacts retirement, cash flow, estate planning, insurance and investments.  Of course the primary reason for this is the magnitude of the potential expense it would take to pay for 2 to 6 years of nursing home or assisted living services.

How much are we talking?  A 2013 survey of 16,000 care providers by insurer John Hancock showed that one-year of a private room nursing home was running about $94,170 (yes, per year).  Of course the cost varies by location (Cleveland was around $80,000 while Naples, Florida was about $105,000 per year) but multiplying this number by say 4 years and that adds to a significant liability. In fact, I read one estimate stating ~70% of today’s 65 year olds will require at least some level of long term care before death.

But what are really the chances of a 4 year stay in a nursing home?  According to a recent survey by Genworth, one the few remaining insurers, 50% of claims that last more than one year extend to 3.9 years.   So 4 years x $90,000 or so = $360,000 – an unsustainable liability for most.  So bring on the insurance guys.

But is it really for everyone?  Well first I reiterate this is a complex decision and with my clients, I bring in a qualified and specialized long term care agent to help qualify, advise and fulfill the policy. (Obligatory disclaimer: I am NOT a licensed insurance agent and don’t give specific advice on insurance.  I don’t sell insurance or any other financial products).

To start thinking about how this all gets integrated, a good reference is a recent article in Barron’s which highlighted some key considerations.

First- who should buy it?  In short: both ends of the financial spectrum.  This means people who expect to have a low level of assets and people who are extremely wealthy can probably do without long term care.  The conventional wisdom is people with relatively low assets could qualify for Medicaid while those with $10 million+ in assets means self-financing is probably the best option.

Second- when to buy it?  Based on what I’ve read it seems like somewhere in the mid-to-late 50’s is a good time to really investigate long term care.  As the Barron’s article notes, a policy bought at 65 can be 50% more expensive than one bought at age 55 and an estimated 25% of applicants between the ages of 60-69 are actually denied coverage.

Third- what qualifies a person to make a claim? Unable to perform 2 of 6 basic activities:  eating, bathing, dressing, transferring from a bed, toileting and continence.  In addition, a person with severe cognitive problems might also qualify.

Fourth – how much does it cost?  Of course it varies widely but premiums can range from $3,000 / year to $6,000+ / year and are subject to increases in future years.

Other “soft questions” to consider:  Do you expect to have help from nearby family members?  Is one of your goals to leave money for your heirs?  Do you want to rely on family members to act as caregivers in your home or theirs?

The bottom line is this:  If you expect to have anywhere between $500,000 and $5,000,000 in assets in retirement, long term care should be a serious consideration.  But there are many complexities with the policies themselves which include elimination periods, inflation adjustments, death benefits, etc.

This is why I believe long term care is very much a pressing topic.  Not only are the policies themselves complicated but add in the interaction with the other aspects of your financial lives and it’s easy to see how this topic can make our financial lives a whole lot messier.

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