By Thomas "Greg" Darden, CLTC | February 21, 2020
Every type of insurance you buy is a roll of the dice. Will you ever need it? And if you do, will it give you the coverage you thought you were buying? Long-term care (LTC) insurance is a classic case where you might ask these questions.
The answers you get are typically just statistics. While they might give you a general sense of the LTC usage landscape, they cannot predict if you’ll ever need the care and – if you do – what type of care you’ll need and for how long.
In that vacuum, it becomes more important to focus on the emotional, financial, and physical consequences to your friends and family, should you have to call on them for this type of help. You’ll also want to recognize the severe financial impact an extended LTC event could have on your retirement and estate plans. How willing are you to curtail the “fun spending” you programmed into your retirement plans? And is guaranteeing a legacy for your family one of your concerns?
So, in light of those questions, what is the ultimate role of LTC insurance? It can mitigate these risks by providing a guaranteed stream of monthly income for a specific period. And, by providing leverage, it means significantly more dollars of benefit per premium dollar spent. This leverage is difficult to match in a market investment over the long term.
What Type of Care Should I Cover?
Over the years, the need for care can present itself in two ways: related to getting older or triggered by a long-term event.
Aging Expenses: The Cost of Getting Older
As we age, we find we start needing help with some of the day-to-day tasks we were always able to do for ourselves. These could be cooking, cleaning, shopping, gardening, home-and-yard maintenance, and driving.
In the industry, these are often referred to as “instrumental activities of daily living” or IADLs. While your inability to handle these tasks might be very frustrating for you, they don’t necessarily qualify you for LTC insurance benefits. You will most likely have to count on the goodwill of friends and family or pay someone to do them for you.
Our recommended approach is to look ahead to your 70s, 80s, and 90s. Try to estimate how much additional income you might need to cover such expenditures during those years. You will have to assess your needs based on your lifestyle and where you live. You can then research what the relevant services cost today in your area.
As part of your planning, you will have identified a “fun spending” budget. You will want to factor these expenses as a reduction of that budget during the later years of your retirement (what we call the “SlowGo” and “NoGo” years). If that is not an option, you can determine the amount of additional money you would need to reserve today to ensure you can cover these future expenses.
A Long-Term Care Event
A long-term care event is not arbitrarily defined. The Health Insurance Portability and Accountability Act (HIPAA) of 1966 established the standards (sometimes referred to as “triggers”) for determining if you qualify to receive benefits under an LTC insurance policy. Those are:
- Inability to perform, for at least 90 days, as certified by a licensed health care practitioner, any two (2) of six (6) of the basic self-care routines that get you through the day. These are referred to as “Activities of Daily Living” or ADLs. They include eating, bathing, dressing, toileting, continence, and transferring (for example, from bed to chair). Assistance with ADLs is considered “custodial care.”
- Cognitive impairment, meaning your memory or reasoning is compromised to the extent that you can no longer interact safely with your environment.
The U.S. Department of Health and Human Services (HHS) says that about 70% of people aged 65 or older will need long-term support and services at some time in their lives. This figure includes two groups:
- Those who only need help with IADLs as described under “Aging expenses” above, or maybe just one ADL, but otherwise do not qualify for LTC benefits, and
- Those who do qualify for LTC benefits (accounting for about 52%) based on the triggers described above.
The majority of those who need LTC will need it for three years or less. In our planning, we consider this length of care to be “typical.” A typical need has a higher likelihood of happening and is relatively less costly. Planning for this type of event would be a reasonable approach if you are healthy and have no family history of chronic disease or dementia.
On the other hand, an LTC event expected to last longer than three years is considered “atypical.” An atypical need has a lower likelihood of happening, but is relatively more costly and can be financially devastating. Such a need often results from Alzheimer’s, Parkinson’s or other forms of dementia, a stroke, or a serious accident.
The progression is that a person will be incapacitated to an extent, but their decline will be gradual. They will require a much longer period of care. As such, these types of events can run up to six to eight years, or even longer in some cases.
What is the Care Setting?
You will want to think about where you choose to receive care and from whom. Also, who will coordinate your care going forward?
LTC insurance used to be thought of as “nursing home insurance.” Today it is a blend of care types and settings in a somewhat predictable progression. It starts in the home and transitions through other settings which might include assisted living and a skilled nursing facility (or nursing home).
Most care though starts and ends in the home, with the family providing care in the early days of a long-term care event. You will want to consider who would be able to provide custodial care for you, whether they would be willing to, and whether you would want them to do so.
Today, LTC policies cover care in the following settings:
In your home or community:
- Homemaker Services provide help in your home with light housekeeping, meals, cleaning, laundry, or running errands.
- Home Health Aides provide part-time skilled nursing care in your home as ordered by your physician for a specific condition.
- Adult Day Care is a community-based service that provides social and support services in a safe and stimulating environment
- An Assisted Living Facility combines residential living with common areas and activities, providing individualized personal care, which may include skilled nursing care.
- Continuing Care Retirement Communities combine residential living with multiple levels of care within one community, from independent living to assisted living and skilled nursing care.
- Nursing Homes are residential facilities with full-service skilled nursing care available 24/7.
Home and community-based care services, as well as assisted living, are typically about half the cost of a private bed in a nursing home.
What is the Cost of Care?
Each year, Genworth Financial publishes the national median cost of care. It includes state and regional costs for each of the six care settings described above. It also looks back five years at the growth rate of these costs.
This information can be a valuable starting point for you to estimate what you can expect to pay for LTC services today, then in the future, based on an inflation rate that you select.
Now you have the basics of long-term care insurance: what it is, what it should cover, the care settings, and the cost of care. Next, we will examine a vital aspect of long-term care: its funding sources. If you have any questions about integrating long-term care into your retirement plan, feel free to reach out so we can help.