I'm asked this question often at
my workshops and presentations, and it's a critical one to think about as you
near retirement. I'm sorry to say,
though, there's no simple answer.
Addressing the threat of potentially
ruinous long-term care expenses could be one of the most difficult challenges
facing you in your retirement years.
But that's no excuse to put your head in the sand--which most people
do--often with unfortunate results.
While long-term care insurance may not be the answer for everybody, I
strongly advocate that everybody does need
to have a strategy to address the threat of long-term care expenses.
Many of us--including my wife and
I and our brothers and sisters--are getting a rehearsal by helping our parents through the last years of
their lives. We've gladly given them
our compassion, time and money--a fitting way to give back for their
substantial efforts in raising us.
But just as important, we've been a witness to the high costs and
diminishment of lives that result from needing care in their later years. Our experience has provided us with a powerful
motivation to do everything we can to prevent or delay this from happening to
us and the resulting burden on our children. While there are no guarantees in life, there's a lot we can all
do to reduce the odds of needing long-term care--and to prepare in case we do
need it.
What Is Long-Term Care?
You'll need to consider getting
long-term care when you can't complete ordinary, daily living activities such
as bathing, using the bathroom, preparing your own meals or following medical
directives, including taking prescription drugs. There's a wide range of
alternatives and costs for long-term care services:
- Low costs: Your spouse, family or friends pitch in and take care of
you (if they're willing and able). The type of assistance you'd need and
the time involved varies widely, from minutes to hours each day.
- Low to medium costs: Home health care, where care providers come periodically
to your home to help you as you need.
- Medium costs: Adult day care or a live-in caregiver. Adult day care can work well for
situations where 24/7 care isn't needed or if household members have full-time
jobs and aren't able to be there when necessary. A live-in caregiver can work if you have a spare bedroom or
two and don't mind someone living with you; you can offer room and board and a
modest salary. Note that this last
approach requires special attention to taxes on the caregiver's salary.
- High costs: Nursing homes, assisted living facilities or residential
care facilities for the elderly.
Costs for these can range from $3,000 to $8,000 per month or more. At this rate, it won't take long to
wipe out your retirement savings.
If you have the funds or long-term care insurance, however, this is one
option to consider.
To make sure we're all on the same
page, let's get the terms straight with these high-cost alternatives. Nursing homes are institutions with
sick "patients" who need focused medical attention. Assisted living facilities have "residents" who need help
with daily living activities. Some
institutions combine features of both; you start in the assisted living wing,
then if your health declines, you move to a wing that's more like a nursing
home. Residential care facilities
for the elderly (RCFEs) are licensed houses in regular neighborhoods that are home to a
handful of senior citizens, typically up to six, with a staff that takes care
of them. RCFEs generally have
lower costs than institutional nursing homes and assisted living facilities,
with the potential for a living situation that feels more like a home. Like anything else, there are good and
bad instances of each type of facility, and you need to do your shopping
carefully.
One last point on the costs: If
you need care for an extended amount of time, the high-cost alternatives can end
up costing more than the price of sending your grandchildren to Harvard! These expenses can easily wipe out any
legacy you had hoped to leave to your spouse, children or charities. If leaving money to your family is
important to you, you'll need to be especially careful when determining just
how to spend your retirement resources.
Why Would You Need Long-Term
Care?
There are two primary reasons you
may need long-term care in your future.
The first is health related: If you're in poor health and can't take
care of yourself, you're going to have to find some help. The conditions that typically require
long-term care and put people into high-cost facilities include Alzheimer's
disease, dementia, advanced osteoporosis or simple frailty of old age. These conditions manifest themselves
over time; usually there's a long period of onset accompanied by agonizing
debate among family members regarding the need for long-term care. The good news is, these conditions can
be delayed, mitigated or even prevented altogether with a healthy
lifestyle--yet another reason to make your health a high priority. See my June and July newsletters for more on
this topic.
The other contributing factor is the
availability (or lack thereof) of family or friends who can help take care of
you. In our grandparents' day,
families weren't dispersed across the country, and family members often took
care of their frail relatives. These
days, having family nearby to help out puts you in the minority. Unfortunately, this may be the only
solution for people who don't adopt the health and financial strategies I
outline each month in this newsletter.
What Can You Do About Long-Term
Care Expenses?
The fact is, medical insurance
policies and Medicare don't pay for most long-term care expenses. And given our current habits
regarding health and the geographic separation of family members, millions of
older Americans are vulnerable to the threat of high long-term care
expenses. As a consequence,
everyone should have a strategy in place to address these costs; that strategy may
or may not include long-term care insurance.
Some people think that Medicaid
will bail them out if they need long-term care. Think again! Medicaid
is a federal program that subsidizes costs for nursing homes and is
administered by the states. This
subsidy is provided for elderly people who are very sick and who have little or
no financial resources. I consider
nursing homes that accept Medicaid to be last resorts, for a number of reasons. First, you need to exhaust your
financial resources, leaving you in a precarious financial situation. Second, you need to show significant
medical need, and not everybody can meet the requirements. Third, not all facilities accept
Medicaid, and the ones that do are often not the most desirable places to live
out your last years. Finally, if
you do decide to go with a Medicaid facility, you might not get your choice of
location, potentially resulting in separation from friends and family.
OK, that's the bad news. But there's good news, too: Long-term
care insurance can help provide protection and peace of mind.
If you're considering purchasing
long-term care insurance--and I recommend that you give it some serious thought--there
are a few things you need to know.
Not all policies cover all conditions or types of facilities, so you'll
need to pay attention to the fine print to make sure you're getting what you
want before you sign on the dotted line.
Also, premiums for individually purchased policies are expensive: Annual
premiums can range from $1,000 to $3,000 or more if you start in your fifties,
depending on the policy's features.
As a result, most Americans don't buy this insurance. Or, unfortunately, some people do buy
this insurance while they're still working--when they can afford the premiums--but
let them lapse when they retire and can no longer afford them.
I encourage everybody to
shop for long-term care insurance as part of your process to develop a strategy
for long-term care expenses. See
how much the premiums would be, and factor them into your retirement
budget. This will help you decide
whether you should purchase this insurance or rely on alternative
strategies. An internet search
will yield good background information on long-term care insurance and
alternatives. One good guide comes
from the National Association of Insurance Commissioners.
Tips for Buying Long-Term Care Insurance
Should you decide to buy long-term
care insurance, here are some tips to read before you do:- Make sure the insurance
company you choose has a lot of experience with long-term care policies. You should look for a company with at
least 10 and preferably 20 years of history with this type of insurance.
- Check to see how many rate
increases the insurance company has imposed on existing policy-holders for the
past five or 10 years. Several
recent rate increases can be a warning flag.
- Look carefully at the fine
print to determine when benefits are payable or if there are limitations for
pre-existing conditions. I've had
family members who were initially denied benefits because they only met five
out of six necessary conditions, even though it was clear they were unable to
take care of themselves in the way you and I would think necessary.
- Make sure the policy covers a
range of care, from home health care to adult day care or nursing homes. Older policies often only covered
nursing homes without paying for less expensive and more desirable
alternatives.
- Be sure to read the policy
carefully before making a commitment because premiums and related benefits can
vary substantially based on the following policy features:
- The amount of daily benefit
payable.
- Whether the daily benefit
amount is fixed in dollar terms or if inflation protection is provided.
- The length of the time before
benefits are payable but after you've entered the facility or are incurring
long-term care expenses (known as the waiting period, the elimination period or
the deductible period).
- How long benefits are
payable. Common periods can be for
just two years, four years or for your remaining life.
And if you do purchase a policy,
don't think that you're home free.
The above policy features can substantially limit the benefits that are
payable, and you still might need to spend significant, out-of-pocket amounts
for long-term care.
Another option is to only buy partial
protection with insurance. You can
purchase a policy that partially insures against the risk of long-term care by
varying the amount of the daily benefit, waiting period, benefit period and
inflation protection, and then pay for the rest of your expenses out of pocket.
One final thought: Large employers
will often offer group long-term care insurance to their employees. These policies can offer better terms
and lower premiums compared to individually purchased policies. If your employer offers this option,
check it out.
A Common Scenario for Married
Couples
The following situation happens all
too frequently with married couples.
The husband is the first to need long-term care, since husbands are
often older than their wives. In
this case, the wife typically becomes the primary caregiver. Eventually the husband passes away,
leaving his wife exhausted--both physically and financially. And there's the distinct possibility
that nobody is left to care for her, should she need long-term care.
For the reasons cited above,
roughly nine out of 10 residents of nursing homes or residential care
facilities are women. If you're
married and can't afford long-term care premiums for both you and your spouse,
a compromise strategy would be to buy insurance just for the wife. However, you need to understand and
accept the potential burden this can place on the wife and have strategies in
place in case the husband needs long-term care. Also, there's the risk that the wife passes away first,
leaving the husband vulnerable. Remember to consider all your options carefully before making
your final decision.
Alternatives to Long-Term Care
Insurance
If you decide not to buy long-term
care insurance, then recognize that at some time in your life, you may need to
pay for long-term care expenses with your own money. If you have substantial assets, this may not be a concern to
you (I bet that Bill Gates doesn't
have this type of insurance).
However, most people aren't this fortunate, so you should consider one
or both of the following strategies:
- Set up a separate savings account that's dedicated to
long-term care expenses and won't be tapped to pay for ordinary living
expenses. Put into this account
the amounts you would have paid for long-term care insurance premiums; over
many years, it will add up and you'll have a significant amount set aside when
needed.
- If you have substantial home equity, hold your home
equity in reserve until you need it for long-term care expenses. At that time,
you can tap your equity through a home equity loan, reverse mortgage or simply
by selling the home and realizing the profit. Avoid the temptation to take out a reverse mortgage or home
equity loan to pay for ordinary living expenses or luxuries during your
retirement years, however. And make
sure you have a realistic estimate of your home equity, recognizing the
potential decline in home values since 2008. Because long-term care expenses can vary widely, you'll need
a minimum of $100,000 and preferably $200,000 or more in home equity to rely on
this strategy, and that's just for one person. A married couple will most likely need more.
While everybody should get very serious about taking care of
their health, this should be even more of a priority for people who don't buy
long-term care insurance. You have
control of so many things that affect your health, so get started now on the
road to better health in order to help eliminate or reduce the need for
long-term care later. Healthy
steps you take today can eventually save you tens or even hundreds of thousands
of dollars down the road!
Some Final Thoughts
Let me repeat myself because this
is so important: Everyone should have a strategy in place to address the
potential threat of ruinous long-term care expenses. It's easy to
ignore this potential risk when you're in your fifties, sixties or seventies,
since the threat seems so far in the future. Resist this temptation! Not only can long-term care be very expensive, but it can be
an emotional and exhausting burden on your spouse and children. I've seen normally friendly family
members have bitter disagreements over how to take care of their parents.
As a result of our own insights
and experience, my wife and I have become health nuts, and we're proud of
it! We don't want to be a burden
on our children; we want to lead full lives up to the very end, and we want to
preserve our assets as a legacy to our children and charities.
I don't want the unfortunate
scenarios described in this newsletter to happen to you and your loved ones,
and the strategies offered here can help you and your family avoid this
fate. So carefully plan your rest-of-life, while you still have the ability to make a difference in
your future. This is a very
important aspect of living smart and living well in your retirement years!
PS. If you think this newsletter will help a friend, please pass it along.
