By Lori Eason, CFP(R)
Over the last several months, we have received a lot of questions concerning long-term care insurance. Not only are many of us facing increased health care costs now (my health insurance premium is going up 20% this year), but the uncertainty in the coming years makes it extremely difficult to appropriately plan for health insurance costs during retirement.
With the average life expectancy on the rise, it's no surprise that the number of people who will need long-term care at some point in their lives has greatly increased. The Centers for Disease and Control state that the average life expectancy is over 78 years, and that number is a lot higher for those with good genes. The US Department of Health estimates that 70% of people over the age of 65 will require some form of extended healthcare during their lifetime. Although the average length of stay in a nursing home is 2.5 years, 20% will need care for more than 5 years. At an average of $80,000 a year with costs rising at about 6% a year, 5+ years in a nursing home can plow through a retirement portfolio very quickly.
Some of you may be thinking, what about Medicare and Medicaid? I'll briefly explain what type of long-term care these government programs cover, starting with Medicare. While Medicare does pay for some short-term nursing home stays, the requirements to qualify for benefits are very specific and it is not intended for long-term stays. Among the requirements is an inpatient hospital stay of 3 consecutive days or more. One notable illness that often does not meet this requirement is Alzheimer's because the patient is often physically in okay shape, but mentally unable to care for his or herself. If all requirements are met, Medicare pays the full cost of the nursing home for the first 20 days. For days 21 through 100, Medicare covers the cost after the patient pays a daily copayment, currently $141.50. After 100 days, Medicare pays nothing. The average daily cost for a private room in a nursing home is $219.
Medicaid, on the other hand, does cover long-term nursing home stays, but it comes at a hefty price, almost all of your assets (at least on paper) and potentially fewer choices when it comes to the quality of care. While long-term care insurance is for the elderly, Medicaid is for the poor. Medicaid is a combined federal and state program. The federal government provides funds to each state with certain requirements as to whom Medicaid benefits must be offered. However, the states administer the programs and each state has its own additional rules and regulations. No matter what state, there are stringent income and resource limitations. In Georgia for example, the income limit for nursing home eligibility is $24,264 per year and the resource limit is $2,000 in countable assets for individuals, $3,000 for couples. Some notable non-countable assets are your home, one car, personal possessions and assets considered "inaccessible." Most importantly absent from this list are IRAs and other investment accounts.
That being said, there is an entire industry structured to help the elderly get rid of their assets on paper, i.e. gifting to relatives or charities, in order to qualify for Medicaid. But even if you successfully eliminate your assets on paper, there are still quality of life implications of relying on Medicaid. To mention a few potential shortfalls of Medicaid, only certain nursing home facilities accept Medicaid patients and you do run the risk of being moved if your facility decides to stop accepting Medicaid or decrease the number of Medicaid beds. Also, you may end up with a roommate, and not by choice. Lastly, in many situations, home health care is a much more preferable option than entering a nursing home, but this benefit is limited through Medicaid if available at all.
So now that we have established that it's generally not a good idea to rely on Medicare and Medicaid for long-term care, I'd like to turn our focus to long-term care insurance. First off, here at Alder Financial Group, we are big advocates for individuals being self-insured, meaning they reach a point where their portfolio is large enough to cover their family's living expenses indefinitely, even in the event of disability or death. However, with health insurance costs raging out of control, long-term care insurance can certainly help mitigate the financial and emotional cost in the event that an individual needs long-term care. But it does come at a high cost and of course there is no guarantee that the policy will ever need to be used. While everyone's situation is unique, instead of trying to find a policy that will cover all long-term care expenses, I generally recommend figuring out how much you would feel comfortable paying out of pocket for long-term care based on your projected retirement income and purchasing a policy that would cover the difference. If you ultimately need long-term care, even policies that are designed to cover only a portion of your costs will be valuable. This is a way to hedge some of your risk without spending an unnecessarily large amount on premiums in case you don't end up needing long-term care.
The subject of premiums brings up the most unpredictable component of long-term care insurance. The younger you are when you purchase the policy, in general the healthier you are and the lower the premium. According to the American Association for Long-Term Care Insurance, the average buyer is 57 years old and pays $2,150 in annual premiums. But unfortunately, double digit increases are standard. John Hancock recently asked state regulators for permission to raise premiums on many of its long-term care policies by an average of 40%! Many carriers assumed more policyholders would let their policies lapse than actually did which severely harmed their analysis. Two big providers, MetLife and Berkshire, recently decided to stop writing long term care policies.
While some insurers are shying away from long-term care insurance, we have already seen a couple new options surface. In response to customer and agent demand, some insurance companies have designed hybrid policies that combine the benefits of life insurance with traditional long-term care benefits. These policies offer heirs a tax-free payout if the beneficiaries don't use all the money for long-term care. Also, government partnership programs are now offered by many states and they offer individuals an incentive to buy long-term care insurance. For each dollar the policyholder receives in long-term care benefits, the state allows them to shelter one dollar from Medicaid limits.
This is a very turbulent time in the health care industry and we are all unsure of what changes will shake out of the health care crisis. For this reason, I don't think it's a bad idea to let the dust settle before purchasing a long-term care policy if you can afford to wait, but if purchasing long-term care insurance is a big cause of concern for you right now or if you are worried about declining health in the next couple years, now is a good time to do some research on policies. I could write a whole other article on what to look for when buying a policy. As a start, please click here to read an article that highlights the shortcomings to avoid when picking a policy. If you are a client of ours and would like to further discuss long-term care insurance, please let Charles, Alan or I know.
With the average life expectancy on the rise, it's no surprise that the number of people who will need long-term care at some point in their lives has greatly increased. The Centers for Disease and Control state that the average life expectancy is over 78 years, and that number is a lot higher for those with good genes. The US Department of Health estimates that 70% of people over the age of 65 will require some form of extended healthcare during their lifetime. Although the average length of stay in a nursing home is 2.5 years, 20% will need care for more than 5 years. At an average of $80,000 a year with costs rising at about 6% a year, 5+ years in a nursing home can plow through a retirement portfolio very quickly.
Some of you may be thinking, what about Medicare and Medicaid? I'll briefly explain what type of long-term care these government programs cover, starting with Medicare. While Medicare does pay for some short-term nursing home stays, the requirements to qualify for benefits are very specific and it is not intended for long-term stays. Among the requirements is an inpatient hospital stay of 3 consecutive days or more. One notable illness that often does not meet this requirement is Alzheimer's because the patient is often physically in okay shape, but mentally unable to care for his or herself. If all requirements are met, Medicare pays the full cost of the nursing home for the first 20 days. For days 21 through 100, Medicare covers the cost after the patient pays a daily copayment, currently $141.50. After 100 days, Medicare pays nothing. The average daily cost for a private room in a nursing home is $219.
Medicaid, on the other hand, does cover long-term nursing home stays, but it comes at a hefty price, almost all of your assets (at least on paper) and potentially fewer choices when it comes to the quality of care. While long-term care insurance is for the elderly, Medicaid is for the poor. Medicaid is a combined federal and state program. The federal government provides funds to each state with certain requirements as to whom Medicaid benefits must be offered. However, the states administer the programs and each state has its own additional rules and regulations. No matter what state, there are stringent income and resource limitations. In Georgia for example, the income limit for nursing home eligibility is $24,264 per year and the resource limit is $2,000 in countable assets for individuals, $3,000 for couples. Some notable non-countable assets are your home, one car, personal possessions and assets considered "inaccessible." Most importantly absent from this list are IRAs and other investment accounts.
That being said, there is an entire industry structured to help the elderly get rid of their assets on paper, i.e. gifting to relatives or charities, in order to qualify for Medicaid. But even if you successfully eliminate your assets on paper, there are still quality of life implications of relying on Medicaid. To mention a few potential shortfalls of Medicaid, only certain nursing home facilities accept Medicaid patients and you do run the risk of being moved if your facility decides to stop accepting Medicaid or decrease the number of Medicaid beds. Also, you may end up with a roommate, and not by choice. Lastly, in many situations, home health care is a much more preferable option than entering a nursing home, but this benefit is limited through Medicaid if available at all.
So now that we have established that it's generally not a good idea to rely on Medicare and Medicaid for long-term care, I'd like to turn our focus to long-term care insurance. First off, here at Alder Financial Group, we are big advocates for individuals being self-insured, meaning they reach a point where their portfolio is large enough to cover their family's living expenses indefinitely, even in the event of disability or death. However, with health insurance costs raging out of control, long-term care insurance can certainly help mitigate the financial and emotional cost in the event that an individual needs long-term care. But it does come at a high cost and of course there is no guarantee that the policy will ever need to be used. While everyone's situation is unique, instead of trying to find a policy that will cover all long-term care expenses, I generally recommend figuring out how much you would feel comfortable paying out of pocket for long-term care based on your projected retirement income and purchasing a policy that would cover the difference. If you ultimately need long-term care, even policies that are designed to cover only a portion of your costs will be valuable. This is a way to hedge some of your risk without spending an unnecessarily large amount on premiums in case you don't end up needing long-term care.
The subject of premiums brings up the most unpredictable component of long-term care insurance. The younger you are when you purchase the policy, in general the healthier you are and the lower the premium. According to the American Association for Long-Term Care Insurance, the average buyer is 57 years old and pays $2,150 in annual premiums. But unfortunately, double digit increases are standard. John Hancock recently asked state regulators for permission to raise premiums on many of its long-term care policies by an average of 40%! Many carriers assumed more policyholders would let their policies lapse than actually did which severely harmed their analysis. Two big providers, MetLife and Berkshire, recently decided to stop writing long term care policies.
While some insurers are shying away from long-term care insurance, we have already seen a couple new options surface. In response to customer and agent demand, some insurance companies have designed hybrid policies that combine the benefits of life insurance with traditional long-term care benefits. These policies offer heirs a tax-free payout if the beneficiaries don't use all the money for long-term care. Also, government partnership programs are now offered by many states and they offer individuals an incentive to buy long-term care insurance. For each dollar the policyholder receives in long-term care benefits, the state allows them to shelter one dollar from Medicaid limits.
This is a very turbulent time in the health care industry and we are all unsure of what changes will shake out of the health care crisis. For this reason, I don't think it's a bad idea to let the dust settle before purchasing a long-term care policy if you can afford to wait, but if purchasing long-term care insurance is a big cause of concern for you right now or if you are worried about declining health in the next couple years, now is a good time to do some research on policies. I could write a whole other article on what to look for when buying a policy. As a start, please click here to read an article that highlights the shortcomings to avoid when picking a policy. If you are a client of ours and would like to further discuss long-term care insurance, please let Charles, Alan or I know.
