ELDER CARE: Long Term Care – The forgotten estate plan
You would be hard- pressed today to find someone who has not known someone or been directly affected by long-term care.
The fastest-growing segment of the population is by far that of people over the age of 60. As we get older, the likelihood that we may need some form of long-term care increases dramatically. Most people, however, are in denial about their chances that they may need such care. In fact, a recent poll conducted by the Gallup organization showed that 76 percent of those surveyed did not think they would need long-term care. However, a recent study shows that’s not the case: One out of of two people who reach age 65 will need care in a nursing home and three out of four who reach 65 will need some form of care in their home.
With these daunting statistics, it’s truly amazing more people are not prepared for this inevitable financial crisis. In 1999, the average cost of long-term care was approximately $46,000 per year and rising.
The average stay in long-term care currently is only about 2.5 years. However, 10 percent who need it will stay for five years or longer. We have definitely seen a rise in these numbers, partially due to the fact that people are living longer, medical technology is improving, and Alzheimer’s disease is more prevalent.
So what are your choices?
There are basically three ways to fund a long-term care stay: pay for it, go on welfare, or purchase a long-term care policy to shift the risk to an insurance company.
A common misconception is that you can transfer your assets to your kids or a trust and the government will step in and take care of you. It’s not that easy, as there have been a lot of restrictions the government has put in place over the last few years to discourage this type of planning. Assets transferred to someone else require a time period, or “look back” of three years. For transfers to a trust, they look back five years. This means that if you have a claim within this look-back period, those assets are going to show up on your asset sheet.
If you’re one of the few who feel you have enough extra money laying around to pay for it yourself, you might want to consider a couple things before you fully adopt this philosophy.
First, the average cost of long-term care today is $46,000. At an inflation rate of five percent, this cost is expected to skyrocket to over $75,000 a year in 10 years.
Secondly, if you stay for three years at today’s rates, after you die your spouse typically has to live on less pension, less social security, and roughly $140,000 less in savings.
In order for the government to pay for your care you must first “spend-down” your assets to the poverty level. With very few exceptions, including your house and your car, you basically have to liquidate most of your assets.
I really do not see a whole lot of difference between the first two options of self-insuring or going on Medicaid. The end result is pretty much the same: You will have a lot less money than when you started. Not to mention the tax burden of liquidating retirement assets to pay for care.
Insuring your future
That brings us to the last way to fund a long-term care stay: shifting the financial risk of care to an insurance company by way of a long-term care policy. We do this with our homes and our autos because if something were to happen to either one, it would be financially devastating.
I believe a lot of people simply do not understand long-term care policies or they think these policies are far too expensive. The cost issue is often a major barrier for many who would like to include this in their financial or estate plan but fear the affordability. But I don’t think you can afford not to.
If it seems unrealistic to pay a premium on a long-term care policy, think about paying $46,000 a year for care. Consider the economics of this.
Assume a husband and wife purchase a policy with a benefit of $150,000 each for whatever care they may need. If they pay premiums for 10 years at $2,000 per year, they will have spent $20,000 on the policy.
This cost represents less than one half of one year’s worth of care. If you were checking into a long term care facility and were offered $150,000 of care for you and an additional $150,000 for your spouse at a cost of $20,000 over the next 10 years, would you be interested? Essentially, this is what you are doing with the long-term care policy; you are leveraging future benefits with current premiums. Over the years, the government has given some tax relief to those who choose to buy their own policies by allowing you to deduct all or part of the premiums. Currently, only those with a lot of medical deductions qualify for this relief. However, there is a legislative proposal now that would give this relief to everyone.
Whichever way you choose to provide for your long-term care, my advice is to talk with someone well versed in this area. If insurance is a possible solution for you, go to an advisor or planner who deals with many highly-rated companies. This will give you a true, unbiased reflection of what is available in this market.
The financial strength of the company is perhaps the most important consideration. With the mature population growing by leaps and bounds, the amount of claims inevitable over the next several years could be enormous. Less stable companies might have trouble keeping up with claims.
I also recommend you purchase a policy that covers any type of care you may need. A limited benefit policy may leave you paying the bills even after you have given an insurance company years of premiums. Don’t be fooled; saving a buck in this area may not be the best thing.
Do not necessarily shop on premium alone, a cheaper policy may be just that–cheap. Maybe you think you might dodge the bullet and are among the 76 percent that think they will not need it.
I submit that you may be hard pressed to find someone in a nursing home that planned on being there. Do not do a disservice to your estate or financial plan and neglect to provide for this important financial issue.
Derek Weeks is the managing partner of Legacy Estate & Financial Services Group in Traverse City. He has spoken to thousands of people on issues affecting estate and financial planning. Legacy regularly conducts seminars on estate and financial planning throughout the country, but focuses its business in northern Michigan.
Learn more at www.legacyestateonline.com or contact them for upcoming seminar dates on this and other subject matter; 800-665-3717 or 933-0631. BN