By Christopher W. Beale, CFP®
“I hope I die before I get old”. Roger Daltry, lead singer from the band, “The Who” sang those lyrics in the song, My Generation. My question to my (Baby Boomer) generation is…What if you don’t? What if we get old and we’re still alive?
I ask this question because we’ve had several clients who needed help from a home healthcare agency, a nursing facility or hospice. Fortunately all had long-term care policies to help pay for the cost of care. Unfortunately I have seen many people who needed care but didn't have long-term insurance. Without this insurance long-term care costs have eaten into nest eggs, retirement plans, and home equity of many retirees and even pre-retirees--one in four middle aged adults between ages 45 and 65 were limited in activities due to chronic health conditions.
The long-term-care discussion is easy to avoid. After all it's depressing to discuss aging and becoming infirmed. Continue this discussion by talking about insurance and premium payments and I'll admit to a long list of items I'd rather deal with before long-term care insurance including, income tax preparation, sweeping the garage, colonoscopies, etc. Regardless, I need to have an adult conversation with all of you, especially with my (baby boomer) generation.
Let's start by defining long-term care. It is the help you may need over an extended period of time to manage, not cure, a chronic condition. Long-term-care assistance could also help perform some daily activities such as: bathing, toileting, dressing, eating, and other mobility issues. Chronic mental impairment typically from dementia and Alzheimer's can require long-term care services for many years. These long-term care services can be provided in a variety of settings including your home, adult day care centers, nursing facilities, and residential and assisted living facilities.
The cost of long-term care, however, is typically not covered by most health insurance policies, Medicare or Medigap policies. These programs cover most acute care costs not chronic care costs. Medicaid will pay for nursing facilities and some homecare but only if you qualify. You qualify for Medicaid by being poor, and by being poor I mean you can have no more than $1,600 in total assets.
Long-term-care cost more than $200 billion per year in the US and most of that is paid by Medicaid. According to the insurance company Genworth, the national median cost of nursing home care is $230 per day in 2013. According to the Connecticut Office of Policy and Management the Connecticut statewide average cost is $381 per day. This is for a semiprivate room. A private room, a telephone, cable TV or other incidentals could increase this cost. The average nursing home stay in Connecticut is 2 ½ years. This 2 ½ year average totaling $347,662 ($381 per day times 365 days times 2 ½ years) doesn't include the fact that many people start with some form of care provided in their home by either paid caregivers or unpaid family members.
I know this is where most of you will skip down to read Chris Lee's article about how we manage your money and construct and rebalance your portfolios, which I'll admit it is certainly a much more pleasant topic. Others will completely ignore the discussion claiming they'll never need long-term care. And this is true ... for only 30% of the population over age 65. Some ask to be thrown off a tall bridge if faced with future long term care issues. But my (boomer) friends, I told you now is the time for an adult conversation!
So why don't we all have long-term care insurance policies to protect our retirement income from potential disability during retirement? I think there are several reasons. It's expensive. A couple in their 50s may pay about $3-$4,000 annually for an average policy. That cost could be $5-$6,000 for a couple in their 60s. The sweet spot for starting a long-term care insurance policy is between the mid-50s to the mid-60s. For the sake of full disclosure at age 53 (Abby is younger than me) we have not bought long-term care insurance yet. My two excuses, which are not part of the adult conversation, are within 2 years my youngest son Mike will choose a college and then I will know what my college expenses are making it easier to budget the long term care premiums. Also those two years will also give me time to lose the 25 pounds that I said I was going to lose for the last 10 years. I make this guarantee publicly today that we will purchase long-term care insurance within two years (whether I lose the 25 pounds or not)!
Another reason people are reluctant to purchase long-term care insurance is because they feel that money spent on premiums will be wasted if they don't need the care. I agree, but this is where peace of mind comes in. I still buy homeowners insurance annually and don't feel bad at all if my house doesn't burn down during the policy period.
Some people feel they can self-insure against this risk. I agree that if your net worth including your house is very low, don't bother buying long-term care insurance. If you need care you will qualify for Medicaid very quickly, which means you have less than $1600 in assets. On the other hand, I have clients who have a net worth of more than $50 million. They can self-insure. But for the vast majority of clients who have done a good job saving for their golden years, paid off their debt including mortgages, and don't feel comfortable covering the cost of unknowable risks, transferring this risk through insurance is a viable option.
There are many valid reasons for making long term care insurance part of the foundation of your financial plan: longevity, rising healthcare costs, the fact that 70% of those over 65 will need some form of long-term care for an average of 2.5 years (that's actually 3.7 years for women), increases in the incidence of dementia and Alzheimer's. The fact is that neither normal retirement planning nor public-policy has kept pace with these demographic and healthcare shifts.
I know from firsthand experience that long-term care insurance should be part of the foundation upon which sound financial planning and strategic investment management are built. Even with good plans and creative strategies a house built on a faulty foundation is at risk.