Planning for future extended care needs is an abstract concept for many individuals and families. We don’t know how we will age, what illnesses might impact us or possibly even who will care for us. Without personal experience, you may feel unsure how to quantify the financial impact. Many people don’t even want to talk about it. While medical advances have improved our health outcomes and extended our lives, the quality of those years comes into question. Extended care isn’t just about when you get old; it can also provide care due to long term impairments related to accidents, injuries or illness.
The price of care can be staggering and has been increasing dramatically over time. According to the Genworth Cost of Care Survey, the annual median care cost of an assisted living facility in the U.S. During 2020 was $51,600. And the median yearly cost of a private room in a skilled nursing facility was $105,850. Remember, these are median price points and may not include the luxury you are anticipating. It’s important to know the costs in your part of the country. These costs are often reflective of the “base” price, and additional fees may be charged for increased levels of care, products and personal services you may need.
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An even more specialized and expensive form of assisted living is memory care. Memory care provides a secured environment with scheduled activities and routines to help lower stress for people with Alzheimer’s or other forms of dementia. According to assistedliving.org, “on average, memory care costs roughly 20 to 30 percent more than assisted living.” Employees in some memory care facilities are trained to deal with the unique issues that often arise because of dementia or Alzheimer’s. Be sure to ask about staff training at any location you consider.
Keren Montandon, vice-president of operations at Dementia Care Education, says that “not every state requires memory care employees to be trained in the care of those affected by Alzheimer’s or related dementia.” Arizona included. She recommends that “caregivers for those living with Alzheimer’s or related issues be dementia care certified. This certification ensures they are educated to understand and manage behaviors and comorbidities associated with more advanced stages of the disease.”
Funding Extended Care Options
Self-funding
One way to address the financial impact of an extended care event is to self-insure. This approach means that you fully shoulder the financial risk associated with the need for long-term care. An advantage of this strategy is that you have not depleted any of your resources if you do not need care during your lifetime. This scenario assumes that you can fully fund the care need on “day one”. Meaning if this happens tomorrow – do you have those assets available? A drawback of self-insuring is that a long-term care event could derail your entire financial plan. This strategy is only suitable for someone with enough accumulated wealth to fund any length of long-term care expense. This level of wealth should be sufficient so that even after incurring the cost for care, it would not adversely impact the family’s lifestyle
Questions to consider if self-funding:
• Is there a family member who can assume the role of caregiver or care manager?
• Do family members know where to turn for care – what resources are in your area?
• Who will monitor the care and make sure the money spent is going toward appropriate care?
Long Term Care Insurance Products
Transferring some or all the financial risk of a long-term care event to an insurance company is another approach to consider. The cost of long-term care insurance depends on a variety of factors. But before we get too far into specific types of insurance, it’s essential to understand a few key concepts and terms applicable to most long-term care policies.
Long term care insurance covers care that’s not generally covered by health insurance, Medicare, or disability insurance. A long-term care insurance policy helps cover care costs when you have a chronic medical condition, disability, or a disorder such as Alzheimer’s disease or dementia that limits your ability to care for yourself.
Depending on the specifics of the policy, care can be provided in a variety of locations, such as:
• You or a family member’s home
• Adult daycare center
• Assisted Living home/facility
• Memory care facility
• Skilled nursing facility
Most policies will offer a specified monthly or daily benefit amount, with a cap on the total lifetime benefit amount. Depending on how much coverage is selected, the premiums will vary.
The following are just a few of the factors that can impact the cost of coverage.
• Age and health: The older you are and the more health problems you have, the more you may pay for a policy. For this type of insurance, you do have to health qualify. It is not a guaranteed issue.
• Gender: Women generally pay more than men because they live longer and are more likely to need long-term care.
• Coverage amount: You’ll pay more depending on how much coverage you elect, such as higher limits on the daily and lifetime benefits or shorter elimination periods.
• Inflation protection: You can generally choose what type of inflation protection your policy offers. Simply put, this is the rate at which your coverage amount increases over time. Policies that provide a compound rate of inflation protection may be more expensive. Policies with a simple rate of protection are generally less expensive. Policies with no inflation protection cost the least – but would increase out-of-pocket expenses at the time of claim. These factors are an important consideration when selecting a policy. The rate of increase in health care costs has been substantial over time. For example, according to Genworth Financial, the cost of a one-room assisted living facility jumped by 6.67 percent from 2017 to 2018. The cost of a shared room in a nursing home grew by 4.11 percent. The rising cost of care has far outpaced inflation and is expected to continue for the foreseeable future.
Insurance Elimination Period
Most policies have what is called an elimination period. This period can vary from 30, 60, 90 days, and up to 365 before the insurer begins reimbursing for any care. During this time, the insured is responsible for the total cost of care. As you prepare your overall financial plan, it’s essential to plan for personally covering the cost of care during the elimination period. It is important to notify the carrier as soon as you feel you meet the qualifying criteria for benefits. This notification will trigger the start of your elimination period.
Benefit Eligibility
Under most long-term care policies, you are eligible for benefits when you cannot do at least two of six “activities of daily living,” (called ADLs), or if you have dementia or another type of cognitive impairment. Either of these situations should be expected to last longer than 90 days. These situations are define long term care benefit eligibility. Notifying the carrier that you are experiencing either of these “claim triggers” starts the claim process and the elimination period, if approved.
ADLs include:
• Bathing
• Incontinence
• Dressing
• Eating – unable to feed self
• Toileting (getting on or off the toilet)
• Transferring (getting in/out of a bed or chair)
Long Term Care Benefit Payment Designs
There is a crucial distinction to consider when evaluating policies. Some policies reimburse the policyholder for actual costs incurred. For example, if your daily benefit is $100 and your actual cost incurred is $80, the policy will only pay $80. Under this reimbursement style policy, you must submit documentation to the insurance company to request a reimbursement. This activity can be an administrative undertaking during what might also be an otherwise challenging period. Many insurance carriers will allow you to do an “assignment of benefit” so that the payments go directly to your home care agency or facility, and they will file the paperwork. You have to approve this, but it does ease some administrative work.
Other policies have an indemnity-style payment where you receive the full benefit that your insurance contract states, regardless of what is spent for care. You would not want to “assign” this type of policy since your care costs may be lower than your benefit payment. This type of policy works well for a spouse or adult children to have the flexibility to use the funds as best needed.
In summary, a reimbursement plan pays the actual cost of care up to the policy limit. In contrast, the indemnity plan pays the maximum policy benefit, regardless of actual expenses incurred. Any benefits paid in either type are subject to the maximum daily or monthly benefit amount and the total lifetime benefit pool of the policy.
In either of these payment options, the benefits are received tax-free as a qualified long term care benefit. There are limits by the IRS in the indemnity model, so you want to be sure you are aware of any tax consequences with that method. With reimbursement, aren’t limited because the money is only released from the carrier for true care costs.
Types of Long Term Care Insurance
1. Traditional Long Term Care Insurance
Even within the category of long term care insurance, there are variations in policy types. Traditional long term care insurance is somewhat like car insurance. For example, you pay an annual premium based on how the policy is built with your car insurance. If you have a qualifying event, the policy will pay a benefit. If you never have a qualifying event, you are simply out the cost of the premium. In the past, most long term care policies were considered “traditional”. Over time, the number of carriers offering this type has dwindled. Suppose you pass away without ever having a claim on the policy? You insured the risk, but there is not any “value” remaining. Just like car insurance, you covered the risk and received benefits only if you needed them. In that case, you are simply out the cost of the annual premiums that you paid. Traditional long term care insurance still offers the greatest leverage for the amount of premium paid versus amount of benefit available.
Traditional long term care policies can be the right fit for those looking for coverage and want to build a policy to fit their budget – they are easy to customize. However, this type of policy has the potential for rate increases, and you need to budget for that. Rate increases impact a class of policyholders versus individual clients. So, you and everyone else who bought that same policy in your state will all have the same rate increase. Rate increases have to be approved by each state’s insurance commission. When buying this type of coverage, you have to budget for potential increases or assume that as you age, other assets will appreciate. You can reduce or redefine your original coverage if presented with a rate increase. Remember, this is a type of coverage you may hold for many years, and your risk tolerance changes as you age and other assets mature.
2. Hybrid Long Term Care Insurance
A hybrid long-term care policy is a life insurance policy with a long-term care rider attached. It combines the benefits of life insurance with long-term care benefits. This type of policy usually provides a long-term care benefit much greater than the death benefit amount. You would not purchase this if you just needed life insurance, but it is an excellent option for long term care planning if you prefer the idea of the residual benefit of long-term care coverage. Many of these can be funded with a one-time premium (best leverage), ten payments, 20 payments, and some are now offering annual payments. The premiums are set when the policy is initially designed and are guaranteed not to change. This type of policy provides much greater premium certainty but usually involves a larger initial investment.
Hybrids are great for “re-positioning” other funds in your portfolio to mitigate risk for long term care. An advantage of this approach is that the policy is available for long term care protection but has the dual purpose of life insurance if not needed for long term care. If long-term care isn’t needed, the policy works like a traditional life insurance policy to beneficiaries. A death benefit is paid when the policy owner passes away. Depending on the policy structure, the owner may even use a portion for long term care expenses – and still have a portion of the original death benefit.
Many long term care policies provide complimentary long term care concierge services when you have a claim (traditional and hybrid). They essentially provide you with free access to a third-party organization that will help coordinate care and help with lining up resources needed by the one going through the long term care event. This service can help relieve much of the burden on loved ones.
3. Annuity with LTC Rider
This product is generally used with older clients or anyone with diminished health. The underwriting is less strenuous, but your leverage is not as great. The unique option that can be used here is the ability to do a 1035 exchange with the cash value built up inside an existing life insurance policy. This option can be a way to transition an old life insurance policy that is no longer needed and re-purpose it for a time when long term care risks are more of a concern. If proceeding with this type of exchange, be sure to work with a professional who can explain the trade-offs.
4. Life Insurance with “free” LTC riders
These are offered when someone is purchasing life insurance for a true life insurance need. The rider is often “added” with minimal or no cost on the front end of the transaction. Many of these claim to offer “long term care benefits” if needed. That calculation is usually done at the time of need – and the fees are taken out then. It’s not a predictable method of planning for long term care funding. The other types discussed above offer guaranteed amounts at the time of claim – these often do not. Again, proceed only with a great understanding of the contract and how to access benefits by working with a trained professional.
Planning Your Next Steps
Considering long-term care costs is an integral part of any long-range financial plan, especially in your 50s and beyond. Waiting until you have a debilitating diagnosis or are needing care is not an option. The two key factors that will drive the cost of insurance is your age and your health.
The premium costs of any long term care planning product can vary widely. This range is largely due to the policy designs and the selected features and coverages. The policy options can be complex, so it’s imperative to talk with a professional to gather all the information you need before deciding.
Planning to navigate a long term care event is deeply personal, beyond just the financial aspect. There isn’t a one-size-fits-all approach when it comes to your family history and preferences. At Versant Capital Management, our advisors recommend evaluating your options and stress testing your retirement plan. A stress test will illustrate the financial impact of how a long term care event could change your financial plan. By taking this approach, you can thoughtfully determine what is right for you and your family.
AUTHORS: Brian Poe is a wealth counselor at Versant Capital Management, a wealth management and investment firm in Phoenix, AZ, serving high net worth individuals and their families since 2004. Maryglenn Boals the owner of Mg Boals, a specialty long term care planning agency in Phoenix, AZ, since 2007. Previously, she was a nursing home administrator and has worked with seniors throughout the Valley since 1985. She is a local and national speaker, published author, and consultant on long term care.
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