Declining ability to take care of one’s self is a rising concern, especially as life expectancy increases. The prospect of spending time in a care facility is not something anyone desires; however, it will be a fact of life for some. As such, prudence demands that long term care provisions be addressed in any financial planning—especially for aging individuals. Let’s review some facts:
- Currently, 70% individuals over the age of 65 will spend time in a long term care facility.
- The average length of stay in a long term care facility is 2.44 years.
- The national average cost of a semi-private room in an assisted living facility is about $250 a day, or $91,000 a year
- Long term care costs have been rising at about 4% per year.
Given these statistics, the financial impact of long term care must be considered in retirement planning. In addition, family conditions must be considered. Will there be a support system (family close-by) that will allow individuals to live at home as the ability to take care of themselves declines? How do we plan for those contingencies? We discuss some of the options below.
Individuals with significant assets have the ability to cover costs of long term care from their own income/assets. Level of benefits and quality of care simply becomes a cost/benefit decision. However, the majority of individuals are not in the position of doing this.
Long Term Care (LTC) Insurance
Long term care insurance is an option for many individuals; however, the LTC insurance industry is in a state of flux. There are several factors to consider here:
- Insurance Company- As with any insurance product, the quality of the insuring company affects the likelihood of future ability to pay. It is interesting to note that two of the largest insurance companies (Genworth Financial and John Hancock) have filed for premium increases on their long term care product. Apparently the actual costs experienced have exceeded the actuarial assumptions used in pricing older long term care policies. NOTE: An obvious implication for policyholders of older policies is to carefully weigh any “opportunity” to switch from an older policy to a newer policy. It is quite likely that newer policies will not provide the same level of benefits at a comparable cost.
- Insurance Policy- The actual insurance policy options vary significantly. Some of the questions to ask about policy coverage are:
- Gate keepers- Gate keepers are those conditions that must be met before the policy begins paying benefits. Usually these are expressed in the ability to perform specific functions (i.e. feeding, toileting, transfer of locations, etc.)
- Care location- Does the policy provide for benefits when the individual is at home with a caregiver, or do benefits become payable only when the individual is in a long term care facility?
- Benefit coverage- How long will care benefits be paid? Is there an escalation benefit to allow for increases in long term care coverage costs over time?
- Exclusion provisions- How long must the individual wait before benefits under the policy begin paying? Is a prior hospital stay required?
Long term care policy purchase decisions warrant significant consideration. Policy differences can be substantial and costs vary dramatically. A frequent question arises concerning when to purchase a policy. The older the individual, the more costly the policy; consequently, purchasing a policy at a younger age (in the 50s age group) might make more sense.
In some cases, long term care benefits are available for individuals who lack personal resources or long term care insurance. Such Medicaid payments are made to the long term care provider on behalf of the individual. Obviously there are conditions which must be met. There are two primary conditions:
- Means test- The amount of monthly income for the individual cannot exceed a certian amount per month.
- Asset test- The assets available to the individual in terms of savings, investments, etc. cannot exceed specified levels.
There are planning techniques available to address these two conditions; they are complex and warrant discussion on an individual case basis.
We at Paragon Financial Advisors do not sell insurance (or any other) products; however, we can help our clients evaluate long term care options available to them. There are alternative products (usually in the life insurance market) which are available but the cost/benefit in them warrants specific analysis. Please call us if you need assistance in planning for your long term care needs. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
United States. Department of Health & Human Services. Long –term Care Insurance Costs. N.p.: Administration on Aging, June. 2012. Web. 14 March 2014.