Strategies for Long-term Care

This is the second of a 2-part series on long-term healthcare with guest writer and national long-term care specialist Chris Sitek, CLTC, CASL, CLU, ChFC, RHU, REBC. The first can be read here.

Broaching the subject of long-term care (LTC) with parents can be a difficult, uncomfortable prospect. They often deflect or short shrift the topic:

They say, “don’t worry about that, we’ll be fine” or “That will never happen to me.” Or the ever-popular joking reference to some method of assisted suicide: “If I ever get like that, just hold a pillow over my face” or “just float me down the river.”

Often we let the conversation end there because we’d rather not rock the boat.

Avoiding an important subject is always a bad idea and the longer we put it off, the harder it gets on multiple fronts. On one hand, we love our parents and want to ensure their wishes are followed as they age and that they receive the best possible assistance or care. On the other, many of us know we will bear primary responsibility for our parents and it is crucial that we lessen the potential for it to affect our physical, financial, and emotional health and that of our spouses and children. Hence, we need to determine what will open these lines of communication.

As far as accessible information, I believe that the most comprehensive resource I’ve seen specifically for this purpose is online at Genworth. Click on the “Planning for Long-Term Care” section and you’ll find an incredible amount of free educational information on how to navigate the conversation regardless of family dynamics and dysfunctions. There is even a FAQ section that includes examples such as What if my sister is a control freak? and What if my parents refuse to take action? They have helpful information for most scenarios and the information is laid out in a very good, not overwhelming format which is typically the problem with things of this magnitude.

Peruse the information and see what applies to your circumstances. Don’t get discouraged! Sometimes it takes multiple attempts and approaches to break through to loved ones. Often it only takes one.

Once we’ve decided to pursue options for LTC for ourselves or our parents, what strategies and products are available?

Can I “save up” for LTC, essentially “self-insuring” the risk?

Say, you’re 40 years old and want to retire at 60 with a dedicated pool of funds for LTC. The funds need to be in a safe, accessible place in case care is needed early, so we are limited to low-yielding, liquid investments like banks and money markets.

If you save $250 per month for 20 years with a 3% rate of return, then you would have roughly $83,000 at age 60. Not a bad pool of money. But consider 20 years from now that 3 years of home healthcare would cost roughly $322,000 assuming 8-hour shifts. Alternately, 3 years at an assisted-living facility would run roughly $263,000, and 3 years in a nursing home would be around $558,000, according to national averages.

So you would need to save a lot in order for this to work and you could not become chronically ill early. If a longer period of care is needed as with early onset Alzheimer’s, for example, running out of designated savings is very likely.

Candidates for this strategy are those with very large incomes and abilities to save. They also need to be very disciplined so they don’t raid the fund or see its value plummet in a market correction. Many pre-retirees thought they had enough saved for retirement and long-term care prior to 2008.

Are new life insurance policies with living benefits a good option?

Several permanent life insurance products now include optional LTC riders allowing for access to some or all of the death benefits if care is needed. It’s important to keep in mind that these are generally available for an additional cost and subject to restrictions.

You can generally draw 2% to 4% of the death benefit per month until the pool of funds is exhausted. It costs roughly 5% to 10% extra to add this feature to a life policy. The downside is chronic care could eat up the entire death benefit, which was the primary reason you bought life insurance in the first place, and leave your family in dire straits when you die. Also, if your death benefit is more modest, it may not cover as much care as you need. Another consideration is that life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender periods.

Candidates for this strategy are those with slightly more modest means that need life insurance anyway. It’s a great way to get some protection when the alternative is none at all.

Other versions of life insurance in conjunction with LTC have existed for years that use large one-time lump sum deposits. Depositing $100,000, for example, would roughly generate $200,000 of immediate death benefit or $400,000 of LTC benefits. These policies are attractive to those who have underperforming assets like bank CDs or older life insurance policies with high cash values that can be transferred, if suitable, to a new policy. Those who simply want to “wall off” a chunk of their nest egg for LTC can better leverage their dedicated funds using a strategy like this vs. savings or money market accounts.

Is LTC Insurance worth it?

LTC insurance (LTCi) is somewhat comparable to disability insurance in that it pays a set monthly benefit after a waiting period, has a limited amount of total available benefits— for a benefit period of 3 years, 5 years, or more—and includes optional features to safeguard against inflation.

However, rather than replacing income, LTCi pays actual LTC expenses. Benefits are tailored around what is affordable and tend to follow a co-insurance strategy. For example, if I buy a policy with a $4,000/month benefit and an inflation hedge, I am confident it will pay for most of the monthly cost of an assisted-living facility now and in the future, but am also prepared for the fact that it may pay only 60% of monthly nursing home costs if needed. Those who very concerned about nursing home affordability can certainly buy larger benefit amounts.

LTCi has gotten a fairly bad rap over the past few years, deservedly so in some instances. At its core it is health insurance, and as such the rates can increase. It doesn’t happen every year, every other year, or even every 5 years, but the fact that it can and does happen has been cause for dismay among the press and public.

Rates can only be raised across the board and with the OK of state insurance commissioners and if rates go up, policyholders get several options to modify coverage, often only slightly, to keep prices at or near original levels.

Why do prices go up? The simplest explanation is this: almost everyone keeps their coverage until they die or exhaust benefits. It’s unlike life insurance which, for any number of reasons, many people cancel well before dying, leaving the insurance company off the hook. With LTCi, a lot of people utilize their benefits—more than the carriers anticipated. Were this not such a substantial risk with such a substantial likelihood of happening (70% need some care after age 60, according to the Centers for Medicare and Medicaid Services), price and rate increase possibilities would be nonissues. We all know people are living longer and what previously killed us now makes us chronically ill.

Candidates for LTCi, by default, continue to be those fresh from LTC horror stories after dealing with mom, dad, or a loved one. They seek out a possible solution to spare their families what they experienced. LTCi can be tailored specifically to what is wanted and includes very popular built-in features like care coordination, which, essentially, is multi-leveled support for the policyholder’s family in determining what will work for their loved one and where to find possible caregivers. Absent this feature, most families don’t know where to turn for help at what tends to be a very difficult time.

Consider all options

Utilizing any of these strategies or products makes things immeasurably easier than having nothing at all, even if they don’t pay 100% of every cost. They give the family options and a degree of certainty at a time when both are desperately needed.

Starting the conversation with your family and eventually a trusted financial advisor will help to determine your ideal course of action from there. Early preparation ensures you and your family are in charge of care when it is needed rather than a slave to it.

Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated.

Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular. 961122/ DOFU 7-2014.