Long-term care is a dreaded concept. If you’ve ever cared for an elderly family member, you know that finding adequate resources to handle long-term care represents a significant challenge for many families.
For many people the answer is simple… family members (most often a wife, sister, or daughter) will provide care at home with the federal government providing a sliver of help through Medicaid funding. It’s not an ideal solution. The burden of providing care can crush the lives of caregivers. Unfortunately, solving the problem of long-term care at the society level is not an easy problem to fix.
First, providing long-term care is expensive. The work is difficult and demanding. And, like other valuable professions such as teaching, the provision of care services is vastly underappreciated in this country. And you can’t easily automate care services.
Second, medical advances have progressed to the point that many lives can be extended, but not improved. Doctors can often do many things to keep elderly people alive, but they can’t reverse cognitive or physical decline in any meaningful sense. As a result, many people who would have perished earlier in life are now living (or rather languishing) longer than they would have 20, 30, 50, or 100 years ago. All of these “extended, but not improved” lifespans result in a higher need for intense care services.
Third, our current system incentivizes a “extend life at all costs” medical approach. Doctors get paid more if they intervene. Most of the funds paid out by Medicare are incurred in the last year (or even month) of a person’s life. Very little attention is paid to hospice or palliative care services. Even less attention is paid to the negative quality-of-life impacts endured by caregivers and family members.
How to pay for long-term care
The financial planning industry has created a basic rule of thumb to handle planning for long-term care expenses:
- Net worth less than $1 million… spend down assets and rely on Medicaid
- Net worth between $1 and $3 million… purchase a long-term care insurance policy
- Net worth above $3 million… self-fund any long-term care expenses
Unfortunately, very few things in life abide the tidy proscriptions of our rules of thumb.
For example, what if you have a high net worth, but you also have a child with special needs who may require life long care services themselves? Very likely, you may want to consider purchasing an insurance policy to protect your assets for the benefit of your child.
Or what if you are in very poor health or terminally ill? If so, then long-term care insurance won’t help much or at all.
Long-term care insurance basics
And what about the insurance itself? Is it a good deal? Don’t the premiums go up every year? We all know that insurance companies can be difficult to deal with and long-term care insurance in particular can present some significant challenges for policy holders.
Here are the basic questions to ask when looking at long-term care insurance:
What is the daily benefit? Benefits are often quoted in daily amounts between $50 and $500 per day.
What is the term of coverage? Most long-term care policies provide 2-3 years of benefits.
What is the waiting period? Once you qualify for benefits, most policies have a waiting period before you can claim benefits. Waiting periods generally range between 30-365 days.
What type of care does it cover? Some policies don’t cover at-home care or assisted living.
What are the benefit triggers? Time to get familiar with the activities of daily living (ADLs). Some policies have more restrictions than others.
Is there any inflation protection? As we all know, inflation is a huge concern right now. Not all policies offer inflation adjustments. Some only offer simple as opposed to compound adjustments. Long-term care policies most often have a multi-decade time lag between purchase and delivery of benefits, so inflation can grind down real benefit amounts. Costs for long-term care services also are likely to grow much faster than headline inflation numbers.
When and by how much can premiums increase? Most policies allow for annual increases. Typically, the insurance company must get approval from state insurance authorities to increase premiums.
Keep in mind that the historical performance of long-term care insurance is terrible. Half of policies ended before paying any benefits, with policy holders not being able to afford premium increases as the primary cause. Skyrocketing costs for long-term care also swamped the benefits paid to many other policy holders.
Hybrid policies
Some advisors are directing clients towards a new version of long-term care insurance that functions as a hybrid of traditional long-term care insurance and whole life insurance. So instead of one complicated insurance product, now you have two squished together. Most people won’t get much benefit from these hybrid policies, unless they have a legitimate need for the life insurance component.
If you decide that you need to purchase insurance, be sure to shop around and find a policy that fits your needs. You may not need a “top of the line” policy. If a policy can cover most of the risk of long-term care, then you’re in a good spot.
A tax planning example
Tax planning can also come into play with long-term care. One popular choice for long-term care is something called a Continuing Care Retirement Community (CCRC). These facilities generally offer multiple tiers or service from independent living all the way up to full time memory or skilled nursing care services.
Bad news… admission to a CCRC is not cheap. New residents often incur a massive upfront fee upon entry. Good news… a portion of the fee is often attributable to medical expenses, so there is the opportunity for a significant medical expense tax deduction. In this case, moving into a CCRC can offer a great opportunity to convert pre-tax IRA or 401(k) assets to a Roth account or recognize other income to offset the large deduction so that it doesn’t go to waste.
It’s about more than money
One of the most important things you can do to manage the costs of long-term care is communicate. Communicate your intentions and desires to your spouse or partner, doctors, kids, or anyone else that might be involved in your care. By communicating your wishes to others, you can potentially head off disaster. If you want to die peacefully at home, then having a plan for how to make that happen is crucial. Emotions run high in life-or-death situations and unfortunately our medical system doesn’t make it easy for family members or caregivers to make decisions contrary to the standard “extend life at all costs” approach in most hospitals.
Here’s an example… your mother is 85 year old and suffers from mild dementia. Maybe she faints one day at home, and is rushed to the hospital. The doctors discover that her heart is not working at 100% anymore (i.e. she’s 85 years old!). If the doctors want to perform heart surgery on your 85 year old mother who has mild dementia, it’s helpful to have a firm understanding of your mother’s wishes about her care. Even a successful heart surgery can have a negative effect on long-term cognitive functioning (aka “pump head”). And fixing the heart won’t magically make the dementia go away.
But it’s hard to tell a doctor, “No thanks, we’ll take mom home and let her die there.” If your mother had created a plan ahead of time, it can get everyone on the same page and help avoid doubt when the time comes to make a decision.
When creating a plan for long-term care, consider speaking with a hospice or palliative care expert. These folks are on the front lines of helping people die well, and they can offer some things to think about when creating your personal plan.
Another perspective
I recently read a book called Knocking on Heaven’s Door by Katy Butler. I highly recommend the book for anyone interested in how to approach the long-term care and death of a loved one.
In the book, Butler tells the story of her parents’ final years. Her father was in great shape until one day he had a stroke that devastated his cognitive and physical abilities. This single event precipitated a 6 year struggle to help her mother manage her father’s care from 3000 miles away, all while balancing her own life, finances, and relationships.
The pivotal moment of the story came when Butler’s father developed some hernias that required surgical repair. Her father had a long standing, but mild heart condition. A cardiologist recommended the installation of a pacemaker, which they ended up agreeing to. In the end, that pacemaker turned into more of a curse than a blessing as it foreclosed one of the most accessible pathways for her father to achieve a peaceful death. Instead, Butler’s father struggled through years of slow decline and suffering.
The stress of care-giving and watching a loved one fall apart took a huge toll both on Butler and her elderly mother. It’s likely that the pacemaker gave Butler’s father a few extra years, but the stress and anxiety of years of care-giving took away a some years of life from her mother.
By communicating and sharing your wishes, you can help relieve the burden on family members, or at the very least, aim to live your life on your own terms and in accordance with your own wishes.
