A Long-Term Care Story

A year ago, one of my golfing buddies, Joe, was an active, healthy 49-year-old who loved sports.

Today, he is in the process of learning how to use a walker.

Without going into detail, Joe was diagnosed with a serious illness, has been hospitalized for months, and probably has to live in a rehabilitation/nursing home facility for up to one year.
The good news is that Joe is expected to fully recover.

The bad news is that Joe’s health insurance does not include a year of long-term care (LTC) services, which will cost his family between $10,000 and $11,000 per month…out of pocket. This has prompted a few of our Saturday morning foursomes to discuss holding a fundraiser to help Joe and his family cope with this overwhelming expense.

With all of the effort it takes for most people to survive in today’s economy, paying for housing, food, and health care often takes precedence over putting money away for long-term care, which many feel is something they can address “down the road.”

Unfortunately, as Joe and many other families across the country know all too well, illnesses can strike at any time – and their arrival may be emotionally, physically, and financially crippling.

Fortunately, the solution may cost only a couple of dollars a day.

Before delving further into possible answers, let’s examine the problem. Health insurance plans do not cover a one-year stay at a rehabilitation or nursing home facility. Even policies that have some level of long-term care benefits offer very limited coverage. Medicare provides short-term LTC coverage for what is considered medically necessary services, and despite what many mistakenly believe, disability policies do not cover long-term care expenses.

What is the probability that you will need long-term care, and when will it most likely occur? Here is a breakdown of the percentage of Americans that may need LTC services based on attained age.

Age Probability
50 Less than 1%
70 8%
80 23%
85 34%
90 44%

As the table indicates, LTC and ostensibly age go hand in hand. The question you must answer is, Am I willing to bet on the probabilities? Or, as Clint Eastwood would have put it: Am I feeling “Lucky?”
How much is long-term care going to cost? The following table reveals annual LTC projections by metro area at a skilled nursing facility. (Please note that LTC expenses vary significantly by state.)

Metro Area Approx. 2015 Cost/Yr Approx. Annual Cost in 20 Year
Anchorage $165,000 $237,000
Seattle $95,000 $385,000
San Antoni $47,000 $95,000
Omaha $64,000 $130,000
Washington DC $95,000 $530,000
Manhattan $170,000 $347,000

So, what are your options?

First of all, protect your assets by talking to your financial advisor or an attorney experienced in estate planning. From a coverage perspective, the following is a short list of possible solutions: self-insurance, longevity insurance, a Health Savings Account (HSA), life insurance, and a long-term care insurance policy.

A healthy 50-year-old may require nursing home services in around 36 years, and the average cost of one year of skilled care in 2051 (assuming this person does not live on either coast) is projected to be approximately $130,000 per year. This person can self-insure and offset this cost by saving about $1.00 a day (based on a 6% annual return). A healthy 50-year-old Bostonian can self-insure for approximately $4.00 a day to cover over $500,000 in expenses.

The benefit of self-insuring is that if you never require LTC services, those assets can be left to your heirs. On the other hand, if you do end up requiring services in the near term, as my friend Joe does, you could be facing a serious financial hurdle.
Another option is to take advantage of the change in Treasury Department rules allowing 401(k) participants to invest in a longevity insurance policy (also referred to as a deferred-income annuity). This particular investment is exempt from required minimum distributions (RMDs) that start at age 70½. When distributions do begin, they can be applied to living expenses or to offset the cost of LTC services, which include home care, assisted living, and nursing homes. Plan participants can invest up to ¼ of 401k assets, or a maximum of $125,000, in a deferred-income annuity and schedule distributions to begin at a specified future age, such as 80.

Another potential tax-advantaged LTC investment is a Health Savings Account (HSA). Investors are not required to spend down savings annually, and these assets remain tax-free as long as they are utilized for approved health care-related expenditures. However, to be eligible for an HSA, an investor must be enrolled in a high-deductible health insurance policy.

A fourth option is a life insurance policy, a product that was primarily designed to provide beneficiaries with a specified cash payment after the death of the insured person. Today, life insurance policies can offer more flexible choices, including LTC riders and/or living benefits, which provide the insured with compensation based on approved medical conditions, such as a terminal illness or permanent nursing home care.

The final option is a long-term care insurance policy. Premiums are based on a host of variables, including age, health, length and level of coverage, and whether inflation protection is included in the policy. It is wiser (and much cheaper) to purchase long-term care insurance at a young age; unfortunately, because working adults often have to attend to more pressing household budgeting issues, long-term care insurance is rarely a high-priority investment. As a general rule, length and level of coverage should be selected based on projected costs within a targeted metropolitan area. Also, it is recommended to maintain premiums below 5% of expected retirement income.

These are a few of the possibilities to consider when evaluating long-term care plans. While this issue has often remained in the background as topics related to The Affordable Care Act and Medicare take center stage, paying for LTC is going to become a very real problem for many aging Americans. Given the expected inflation rate of LTC services, increasing longevity tables, and the likelihood that a high percentage of the 78 million Baby Boomers will probably require some level of LTC over the next 20 to 30 years, being able to afford services offered by a limited pool of providers may become important in an expected seller’s market.

So as I reflect upon my friend Joe’s current situation, I can only offer this final piece of advice: become proactive – and start today. For as little as $2.00 to $5.00 a day, you can hammer a fairly sizable dent in the cost of LTC services.