17
Long-Term Care

When I’m Sixty-Four

WHY do I need to read this chapter?

In 1967, the Beatles released the song, “When I’m Sixty-Four.” The lyrics are a preemptive plea to secure a relationship even when the realities of old age set in. Now, as the nation’s largest generation whistles this tune into retirement, the question seems less rhetorical:

Who is going to take care of us in retirement?

Long-term healthcare is on the minds of retirees and pre-retirees, and for good reason. Rising healthcare costs don’t appear to be slowing down. Employers, as well as local, state, and federal governments, are increasingly passing on the rising financial risks of healthcare to employees. And the most costly form of care, long-term healthcare, is not (I repeat, not) covered by Medicare.

Long-term care insurance (LTCi) would seem to be a ready solution, but it appears expensive and even more confusing than disability income insurance (chap. 16). Is long-term care insurance “the answer,” or just a smoke-and-mirrors sales pitch? The answer lies somewhere in between, but this much is true:

While not everyone needs long-term care insurance, everyone needs a long-term healthcare plan.

Federal Programs

Before we get into long-term care insurance, let’s discuss the programs that already are in place and into which most of us default:

In its own words, “Medicare is the federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD).”1

Although decisions involving Medicare are notoriously complex—the program is a veritable alphabet soup2—most of us are aware that Medicare is federally administered health insurance for retirees.

Within the context of this chapter, what Medicare does not cover—long-term care—is of greater importance than what it does. And just in case there is any ambiguity, let’s define long-term care, again with a definition directly from Medicare:

Services that include medical and non-medical care provided to people who are unable to perform basic activities of daily living like dressing or bathing. Long-term supports and services can be provided at home, in the community, in assisted living, or in nursing homes. Individuals may need long-term supports and services at any age. Medicare and most health insurance plans don’t pay for long-term care. (my emphasis added)

It may be more precise to say that Medicare does not cover the costs of longer long-term care,3 as the program will pick up the bill for select services (including hospice) so long as they do not extend beyond 100 days.

Many assume long-term care is administered by a nursing home, and while that belief is not false, it is incomplete. Long-term care is provided in numerous ways, including at assisted living facilities and in the home. What defines long-term care is one’s need for help with ADLs (Activities of Daily Living), like bathing, dressing, transferring, toileting, continence, and eating. That’s according to the Federal Long Term Care Insurance Program.4

While Medicare does not cover us for long-term care, Medicaid does:

Medicaid is a joint federal and state program that helps with medical costs for some people with limited income and resources. Medicaid also offers benefits not normally covered by Medicare, like nursing home care and personal care services.

Unlike Medicare, Medicaid does help with the costs associated with long-term care, but it comes at a price—just about everything you own. Although some states differ, it is generally very difficult for an individual to qualify for long-term care coverage through Medicaid unless their net worth is below $2,000. That’s not a misprint.

Medicaid is healthcare for the truly impoverished, at any age. While there are legal strategies people have employed to create the appearance of poverty (where it does not exist) for the purpose of qualifying for Medicaid, newer laws have made this more of a challenge.

Decisions, Decisions

So, we’re all on our own to pay for long-term care. Or, we buy insurance—long-term care insurance. The decision we make depends largely on the answers to two questions:

1. What is the probability that you will need long-term care services?
2. Can you afford to self-insure, to fund it yourself?

Regarding the probability, the available numbers seem capable of indicating nearly anything. An oft-cited statistic promoted by the insurance contingent suggests that “more than 50 percent of us . . . will need some kind of long-term care.”5 But you can also find competing statistics,6 which suggest the “more than 50 percent” stat is overblown.

Here’s the problem: the only statistics that matter are those that will affect you and your family, and you won’t know which ones those are until it’s too late. As economist Richard Thaler, coauthor of the book Nudge, says, “No one thinks they need long-term care until two years after they need it.”

So perhaps the more important question is the second. Can you afford to fund long-term healthcare if you end up needing it? According to the US Department of Health and Human Services, some average long-term care costs from the year 2010 are as follows:

• $205 per day or $6,235 per month for a semi-private room in a nursing home
• $229 per day or $6,965 per month for a private room in a nursing home
• $3,293 per month for care in an assisted living facility (for a one-bedroom unit)
• $21 per hour for a home health aide
• $19 per hour for homemaker services
• $67 per day for services in an adult day healthcare center7

So you tell me, could you afford an additional $80,000 or so of annual expenses (per person) following a long-term healthcare incident?

Perspective

Allow me to offer some perspective.

If your total net worth is less than $250,000, the cost of long-term care insurance is likely prohibitive, relative to the amount of assets being protected. In a comparatively short period of time, your assets would be consumed by healthcare costs and you could then rely on Medicaid to pick up the tab. On the other extreme, if your liquid net worth (excluding your home) is in excess of $2.5 million, you may consider yourself capable of self-insuring the long-term care risk, although I must disclaim that this is highly dependent on your non-health-related spending.

Does that leave you with the majority of Americans who fall within that vast, middle chasm? And therefore back to a conundrum?

Well, how about some additional perspective on the cost of long-term care insurance?

According to AARP, the average annual premium for a long-term care policy purchased by a person age 55 or younger, is $1,831. That’s for a typical policy with reasonably good coverage. Per person. In 2012. If you’re between ages 55 and 64, the number goes up to $2,261.8 It only increases further from there. Unfortunately, these numbers also look a bit low in comparison to today’s prices for similar ages and policies.

Is the decision looking any easier? I was afraid not. But I have some good news for you.

Solomonic Wisdom

Your choice need not solely be between two extremes—bearing all the financial risk of an extended long-term care stint or transferring all of that risk to an insurance company. You may recall from our risk management primer (chap. 14) that insurance is not the only—or in many cases, the preferable—way to manage risk. Before transferring the risk to an insurance company, we must consider ways we can eliminate, reduce, or responsibly assume it.

Therefore, if your financial situation appears strong, but not impenetrable, consider proportionately reducing the features of a bells-and-whistles LTC policy, and thereby, the premium. The irony here is that I rarely recommend the Cadillac policy to anyone. If you can easily afford the higher premiums, you likely have the sufficient means to warrant a smaller policy to begin with.

So here comes that hard part—understanding these policies.

Moving Pieces

I apologize in advance, but I’ve actually slimmed this list to address only the most important policy features. It’s a simple accounting of moving pieces with accompanying explanations:

• Facility daily benefit is the cost per day (in most cases) the policy will cover. Consider acquiring quotes based on a policy that would cover you for $100 per day. Then you can easily determine a higher or lower multiple of that policy rate based on the round number.
• Facility benefit period is the length of time over which the policy will pay out. The average stay in a long-term care facility is between two and three years. Most people, however, utilize care for even less time. The numbers are skewed upward by the relative handful of folks who suffer from dementia or Alzheimer’s disease for a particularly long stretch. If your tolerance for risk is very low, you may consider a lifetime benefit. But if you are focusing more on the probability, consider a five-year benefit.
• Home care daily benefit is the percentage of the policy benefit that could be applied to skilled care in your home. Because it’s the preferred method for most people, you might only consider plans offering 100 percent of your benefit to be applied to home care.
• Inflation protection describes how the future inflation of healthcare costs will be factored into your benefit. With the future cost of healthcare expected to rise at a pace above the normal inflation rate, this should be a primary concern for the prospective insured. If you are in your fifties or sixties, strongly consider compound inflation protection. If you are in your seventies or older and considering a policy, the premiums are likely to already be extremely costly. You may consider a simple inflation protection calculation or no inflation protection to reduce the costs of the policy.
• Facility elimination period is the initial time frame in which the policy will not pay. Because Medicare will typically pay for the first 100 days, and because you hopefully have sufficient emergency reserves (chap. 7), consider an elimination period of 90 days or more.
• Marital discount is a meaningful price break for couples who are purchasing long-term care insurance (LTCi) together. Many insurance companies now offer “shared care” policies that offer less stringent underwriting and reduced costs. But be sure to consult your LTC plan before choosing this option. A couple should evaluate their health conditions separately. For example, a spouse with a family history of dementia or arthritis should strongly contemplate applying for LTCi before major symptoms occur, because by then, you’re likely to be turned down.

The Simple Money LTCi Guide

The average policy prices mentioned above—ranging from $1,830 for someone under 55 to $2,260 for someone under 65—assumed that they provided a daily benefit of $150, four to five years of coverage in home, a 90-day waiting period, and 5 percent automatic compound inflation protection. The actual policy offers you receive will be dependent on current pricing, your geography, and especially, your personal health as determined through the underwriting process.

With that perspective, consider applying this guide for exploring your own coverage:

The Simple Money LTCi Guide

1. Be honest with yourself. When considering your age, health, lineage, retirement income, assets, and tolerance for risk in their entirety, is transferring all or a portion of your long-term care risk through insurance a wise move? (The default answer is “probably.”)

2. Get a quote for long-term care insurance based on the following policy template:

a. Daily benefit of $100

b. Benefit period of five years

c. Home care benefit of 100 percent

d. Elimination period of 90 days

e. COLA rider tied to inflation (CPI) if available

f. Marital discount if appropriate

3. Adjust the policy to reflect your personal risk characteristics.

Since we used a round number for the benefit, $100 per day, it will be easy to discern how the policy premium would adjust in the event you change the coverage level, for example, a $150 or $180 daily benefit. In that case, the premiums would likely be about 50 and 80 percent higher, respectively. As with life insurance and disability income insurance, I recommend you seek the services of an insurance specialist to aid you in the process of acquiring a long-term care policy, as long as you’ve conducted this analysis and already know what you want.

The Bottom Line

I recognize that the bottom line—the annual cost of the policy—is a meaningful determinant of whether or not you will purchase this insurance. Unfortunately, too many people get sticker shock after being pitched a top-of-the-line policy, and ultimately purchase nothing. The Elephant has a gut feeling that this is important, but the Rider overrules (chap. 3), deeming such a policy cost prohibitive.

This is why I’ll leave you with this highly technical advice, designed to synthesize the probability of your need for long-term care insurance with your tolerance for risk and willingness to part with premium dollars:

Something is better than nothing.

Simple Money Long-Term Care Summary

1. Who will take care of you if you need long-term healthcare in retirement? Not Medicare.
2. The probability of your need for long-term care insurance is likely exaggerated by the insurance industry, but it is still a risk that you can’t ignore. Not everyone needs long-term care insurance, but everyone needs a long-term healthcare plan.
3. Be honest with yourself—could you afford an additional $80,000 per year (per person in your household) for a long-term healthcare incident?
4. If you have less than $250,000 in net worth, you likely should not buy long-term care insurance because the relative cost is prohibitive. If you have in excess of $2.5 million in liquid assets—not including your primary residence—you may consider self-insuring the risk of long-term care.
5. If you fall in the middle (and that’s probably you), consider partially insuring the risk instead of ignoring it completely.

What INSIGHTS or ACTIONS did you take from this chapter?