More than 70% of people over the age of 65 will need some sort of long-term care during their lifetime. In addition, there is a 40% chance that they will enter a long-term care facility if they reach the age of 65, and a 20% chance of staying there five years or longer.
Even though the average stay in a long-term care facility is two-and-a-half years, any length of stay can take a toll on retirement savings.
The average daily rate for a Maryland nursing home is $260, or $94,900 annually. Other forms of long-term care might not be as financially devastating, but they can still significantly deplete one’s assets.
Assisted-living facilities, where people can get help with routine daily activities and chores, are much less expensive, averaging $46,800 annually. For those who choose to stay in their homes, a home health aide can assist them for about $20 an hour. Another option, adult day care, also allows a person to stay in his or her home for an average cost of $79 per day, or $20,540 annually.
Paying for Long-Term Care
After deciding which form of long-term care is needed, the question of how to pay for it still remains.
There are four primary ways to pay for long-term care: Medicare, Medicaid, self-insuring and long-term care insurance.
Medicare will cover up to 100 days of long-term care, but only if the person has previously been in a hospital for three consecutive days (admitted, not “under observation”) prior to needing long-term care services. In addition, only the first 20 days are covered in full — the remaining 80 days require a co-payment. Medicare is not an option if the long-term care needed is truly “long-term.”
Medicaid was designed to help those with limited resources and limited incomes. However, many Americans want to avoid depleting their assets and resources, as Medicaid requires, so that they can pass their assets on to their heirs. In addition, individual choices are limited under the Medicaid program. Not all long-term care facilities participate in Medicaid, and many that do limit the number of Medicaid occupants.
Self-funding is for those who have significant invested assets and/or substantial fixed income, such as a pension. This option is especially attractive to those who would be turned down for other options due to medical reasons. However, an extended stay in a long-term care facility could significantly deplete their assets.
The greatest risk exists for married couples where one spouse has an extended stay in a long-term care facility. For example, if one spouse requires an extended stay in a nursing home due to dementia, she could be there for 10 years or more, costing around $1 million. While she would be covered by Medicaid should their assets be depleted, the healthy spouse no longer would have assets at his disposal for living expenses.
A long-term care insurance (LTCI) policy pays a specified daily amount for nursing home care for a specified number of years or for the policyholder’s lifetime. The policy typically covers care in other settings as well, such as the home or an assisted living facility.
The three principal reasons to purchase LTCI are to preserve assets for a spouse or heirs, to assure a choice of where and by whom care is provided, and to protect one’s family from the consequences of providing long-term care.
LTCI has four key components, and the LTCI premium is affected by the amount of coverage purchased in each category.
- Daily Benefit: The amount of benefit paid by the insurance.
- Benefit Period: The length of time the insurance will be paid.
- Compound Inflation Protection: The daily benefit will increase by a fixed percentage each year until long-term care is needed.
- Elimination Period: The period of time after long-term care is entered and before the insurance company begins to pay benefits.
A “shared care” policy could help reduce the cost of LTCI. With this type of policy, a married couple purchases one policy and splits the benefits between them. For example, if a couple buys a benefit period of six years and one spouse uses two years of coverage, the second spouse would have four years of coverage remaining.
Work in Progress
It is important to know that LTCI is relatively new and that it is still evolving. Insurance companies do not yet have reliable data upon which to base premiums.
An individual also needs to be concerned with the financial health and stability of the company providing coverage. Accordingly, one should expect to see changes in both the premiums paid and the coverage received in the years ahead.
Whether a person self-insures or purchases LTCI, planning for long-term care expenses in retirement is essential. Taking the right steps so that you are prepared for the unexpected will not only give you peace of mind knowing that your financial future is secure, but will also give you the confidence of knowing that you will have the care of your choice, while ensuring your long-term care will not be a burden to your family and heirs.
Thad Ismart, CFP, is a senior financial planner at Baltimore Washington Financial Advisors. He can be reached at [email protected].