All About Long-Term Care

By Macy Jae Moore on February 17, 2023

Written by: Zeke Anders

Long-term care is top of mind for many families today. We are living longer which is a blessing, but unfortunately sometimes our mental or physical health declines in our later years. Many families have seen a family member need some form of care. Addressing long-term care from a financial perspective is tricky due to the wide range of potential scenarios and variety of options available. The factors we’ll look at are how likely is it you might need some type of care, what type of care that is, how long you’ll need care, and what might that cost, and then discuss some of the options for paying for that care. The point of this piece is not to advocate one solution over another. We will spend a lot of time on long-term care insurance because it is a complicated subject, but that is not meant as an endorsement or rejection of it. The best tool for long-term care will depend on your situation and preferences.

According to the U.S. Department of Health and Human Services, there is a 70% that someone turning age 65 will need some type of care^[1]. On average, those needing care will need care for 3 years. Women generally need care for 3.7 years, whereas men only need 2.2 years of care. 65% of people receive some type of care at home, for an average of 2 years. Only 35% of people need nursing home care, and 13% use assisted living care, both are generally for a year or less. The challenge is that these are averages, and of we may all know of family members or friends who needed care for longer durations. Per the same source, 20% of 65-year-olds will need care for longer than 5 years.

Source: acl.gov/ltc, accessed November 30, 2022

Another study from 2016 by the Urban Institute and the U.S. Department of Health and Human Services found that 52% of Americans turning 65 would need long-term care, for a period of less than two years^[1]. One-in-seven Americans would have a disability lasting more than five years.

With respect to the cost of care, Genworth provides annual estimates for local care.

Source: Genworth.com, accessed January 31, 2023

As shown in the paragraph above, most people will use some form of home-based care. While much home care is provided by unpaid family caregivers, to hire help costs $4,004 per month at the median. Assisted living may cost $3,345 per month but could be higher depending on the facility. Over a longer period of time, these costs could add-up. The 2016 study mentioned above found that the average 65-year-old American would spend $138,000 on long-term care (in 2015, equivalent to $172,879 today), and 15% would spend more than $250,000 (in 2015, $313,188 today)^[1].

There are various options to pay for long-term care costs. One thing to note, is that Medicare does not pay for long-term care services, outside of 100 days for skilled nursing care after a 3-day stay at a hospital. Some Medigap plans extend that period, but in general it is short and very limited. Medicaid is a program for low-income individuals and is the largest single payer of long-term care services in the country. However, the requirements to qualify for Medicaid are very strict. The rules vary by state, but in general you can have no more than $2,000 in bank account or investment assets ($3,000 for a couple), and monthly income can’t exceed $2,523. You are permitted to keep one car. There’s a “look back” period of 5 years as well, meaning if you transfer assets within the previous 5 years before applying, your Medicaid benefits will be delayed. Medicaid is a payor of last resort, in most cases.Self-funding is one option for long-term care, which is simply using your assets to pay for care. You (or an advisor) may look at the probabilities and cost of care above and determine that you can cover the cost of care from your assets. Alternatively, you may decide the cost of insurance is prohibitive and prefer to self-fund if the need arises. This can be a perfectly acceptable solution depending on your financial situation, and perception of the risk of needing care. If you know a family member will provide unpaid care, that could be a factor as well. Your investments may grow more in the time before you need care than what the insurance company offers in benefits, and if you end up not needing care you will have saved money on premiums in a traditional long-term care policy, though investment performance is not guaranteed.

Long-term care insurance is another option. Long-term care insurance is a relatively new product that was introduced in the 1960’s. Without much data available, insurers underpriced the risk they were taking. They offered policies that promised too many benefits for the premiums they were charging. As a result, many long-term care insurance providers stopped offering new policies, raised premiums on existing policies, and even ran into financial difficulties. These policies were “use-it-or-lose-it” policies, like health insurance. Per the National Association of Insurance Commissioners (NAIC), there were more than 100 insurers offering long-term care insurance in 2004, and only a dozen in 2020^[1]. Premium rates have increased significantly, and the bad press has hurt the reputation of the product. These policies still exist, and insurers have more data now for pricing them. Premiums can still be increased over time, and benefits are generally limited to a lifetime maximum.

Today, hybrid life insurance/long-term care policies have emerged as an option. These policies offer a specified monthly benefit for a certain period of time, or a pool of benefits to be used as needed, but with a death benefit if the policy is not needed for long-term care. Generally, these policies have a defined premium amount over a certain period, such as ten years, versus paying premiums the rest of one’s lifetime. The death benefit will not be comparable to regular life insurance policies, but it does reduce the concerns around paying premiums and getting no benefits. The traditional long-term care product will generally have lower premiums since the insurance company is not guaranteed to pay any benefits, but the payments will continue for life. However, they do carry the risk of premium increases, although insurers have more data today and can better estimate the costs and likelihood of care. The hybrid policies provide the benefit of a shorter premium period, as well as a death benefit if care isn’t needed. Hybrid policies generally have higher annual premiums than traditional long-term care policies due to the short period of premium payments, as well as the death benefit which guarantees the insurer will pay something. Traditional long-term care will usually have lower annual premiums since they are paid for life and the coverage is use-it-or-lose-it, though over a long lifetime these payments could result in greater total outlays, and the premiums could be increased in the future.In order to receive benefits from a long-term care policy, generally one must be unable to perform two of the six “activities of daily living”: bathing, dressing, eating, continence, toileting, and transferring. Many policies have an “elimination period”, a period of time after eligibility but before benefit payments begin. Often this period is 90 days, where care may be required but the insurer does not begin making payments. There are two ways benefits are paid, either cash indemnity or reimbursement. In cash indemnity policies, the insurer sends a check for the stated amount, regardless of the cost or location of care. For example, your policy may provide for $5,000 in monthly benefits, but the cost of care is only $4,000. In this case, the insurer will send you a check for $5,000 regardless. In a reimbursement policy, you will send receipts to the insurer, and they will send a check once the expenses are approved. While a cash indemnity benefit sounds more attractive, a reimbursement policy may offer higher benefits, since the insurer knows that the full benefit may not always be needed, whereas cash indemnity policies will always pay the full benefit. The tradeoff may be worth the reduced hurdles, but it is important to be aware of it. Most policies, if not all, will include to option for cost-of-living increases. They generally do not track an index like the Consumer Price Index, but they will increase benefits by a specific amount, generally 3% or 5%, on either a simple or compound basis, each year. A benefit without the cost-of-living adjustment will start higher but may not keep up with inflation. A 3% or 5% cost of living adjustment will reduce initial benefits but increase over time.

The price of long-term care insurance will vary based on your age, gender, and the type of policy. The insurance tends to be cheaper when you are younger, because the insurer expects to have more time to invest the premiums before needing to pay for care. Additionally, you do have to qualify for long-term care. The insurer will check your medical records and ask some questions to determine your current health. As such, it may be beneficial to look into a policy earlier, say in your 50’s or early 60’s, rather than waiting. With time, the premiums will get more expensive, and your health might deteriorate. For more information on long-term care insurance, the National Association of Insurance Commissioners has a free consumer guide to long-term care ebook: https://content.naic.org/consumer/long-term-care-insurance.htm, or, of course, you can reach out to your advisor. 

There may be other options for funding long-term care, but these are the most common. Utilizing home equity in some fashion may also help if needed. As we live longer thanks to discoveries in biology and medical science, and as families increasingly disperse rather than stay in one city, long-term care is becoming more prevalent in our society. Each family has different experiences and expectations around long-term care. It is helpful to know the data and the options for covering the costs if care is needed. Unfortunately, there are no rules-of-thumb or blanket advice to apply, but having the data and engaging in conversations with your family and trusted advisors can hopefully lead to a plan for managing long-term care risk.

Zeke Anders – Planning Specialist | zanders@twickenhamadvisors.com

Disclaimer

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.