The first time I meet with new clients I ask them to bring in all of their current financial plan and very often as I am reviewing their current plans I discover a hole where long term care expense planning belongs. As many of my clients already know I am an enthusiastic advocate for a comprehensive financial plan that includes coverage for long term care expenses. I've written about this issue in the past but it is an issue I have navigated through with my own family so this is a topic very near and dear to my heart and it bears repeating.
If forced to, most people can crunch the numbers and come up with at least a ballpark figure of their monthly expenses. We encourage all of our clients to do this and, at times, we need to remind them of the items they may be “forgetting” to include in that number—items such as golf memberships. But, really, most people can figure out what their monthly expenses are. This is important, especially when planning for retirement, because a critical piece of retirement planning is income planning; making sure that there is enough guaranteed income to cover those monthly expenses.
As I have mentioned before, Susan Roman and I teach a class to people who are a few years away from retirement and a different class to those who are already in retirement. In both classes, we discuss the importance of hedging for inflation. In other words, we caution people to incorporate in that income plan a strategy to make sure the income needed to cover those monthly expenses will increase with inflation, since we all know that the rising costs of goods and services can be devastating to someone living on a fixed income.
In the past, we have also written about the different measures of inflation and the importance of understanding that the measure used for inflation by the government does not always reflect expenses that are most relevant to retirees. For example, a recent report by HealthView Services shows that retiree healthcare expenses will rise at an average annual rate of 5.47 percent for the foreseeable future, which is almost triple the reported US inflation rate from 2012-2016 (1.9 percent). What is even more alarming is that long-term care expenses are not even factored into the cost estimates in that report.
So, you may be wondering how people can plan for the expense of long-term care when they are putting together an income plan. Well, folks, unfortunately, there is no easy answer.
Susan and I believe that paying for long-term care is the biggest concern that today’s retirees face. I’m sure most people would agree that we want to leave this world while we still have our independence and our faculties, but unfortunately for many, that does not always happen. Many of us will need long-term care. And in a nutshell, there are three ways to pay for long-term care: out-of-pocket; with insurance; or by becoming eligible for Medicaid (the federal needs-based program). Many people are under the false impression that Medicare pays for long-term care. It is important to understand that Medicare only pays for a limited amount of long-term care under limited circumstances. So, what can we do?
The first thing we recommend is to get an idea of the costs associated with the different types of long-term care available in the area you live. You may have an idea already, if you have a loved one who receives long-term care. Otherwise, start making some phone calls. Get an idea of what home health care costs compared to assisted living and nursing home care. It is impossible to plan for an expense without having any idea of what that expense is. Once you have done that, consider your options.
As I mentioned above, some people pay out-of-pocket directly to the provider for long-term care. They either have enough liquid assets to pay, or they tap into the equity in their home. Often a retiree’s home represents a significant portion of his or her overall net worth and so that asset cannot be overlooked.
Many people, however, do not want to spend down their assets because they want to leave as much as they can to their loved ones. For some, Medicaid Planning is a process used to reposition assets in order to become eligible for Medicaid. However, it is essential to speak to an attorney who is an expert in that type of planning. There are many restrictions and factors to consider before repositioning assets.
For those who are not eligible for Medicaid and who do not want to spend down their assets, the third option is insurance. Generally, there are two types of long-term care insurance: traditional and asset-based. Traditional long-term care insurance usually requires the payment of a monthly premium and will pay out benefits only if the policy holder requires long-term care. This type of insurance can be very costly, especially when people wait to obtain such a policy. Also, just like with health insurance, premiums paid are never refunded, even if the care is not needed.
An example of an asset-based long-term care insurance policy would be a combination life insurance/LTC policy. Such a policy would require a fairly substantial lump-sum payment. If long-term care is needed, a long-term care benefit would be paid out. If it is never needed, a death benefit may be paid in the form of life insurance. With such an asset-based policy, in exchange for the premium paid, the policy holder receives a benefit in at least one form, either for long-term care coverage or as a death benefit paid to his or her loved ones. Of course, the assets used to fund such a policy are usually not available to the policy holder during his or her lifetime, unless in the form of long-term care benefits.
If you are considering either type of long-term care insurance, as always, it is critical that you understand what you are buying. You need to know what the benefits are, the coverage limits, the exclusions, the benefit triggers, the type of care covered (at home or only in a covered facility), the potential for rate increases and any and all tax benefits or consequences associated with the policy.
As scary as it may be, it is important to come up with a game plan to pay for long-term care, while you can, and hope that you never need it.
1. HealthView Services’ 2017 Retirement Health Care Costs Data Report