Long-Term Care, the Discussion No One Wants to Have

The recent coronavirus pandemic has brought nursing homes in the into the spotlight for the many challenges that the elderly face. Given medical advances, people in general are living longer and their families are tasked with the responsibility of providing the best care options for them. And yet, the discussion about how to pay for nursing home costs is one that no one wants to have. This commentary will provide you with background on the cost of care, and potential ideas on how to plan for coverage of these expenses. Also, we hope to clarify some common misconceptions that exist, especially with regard to Medicare.

Some key statistics from the Administration on Aging regarding who may require nursing home care are as follows:

• Someone turning 65 today has almost a 70% chance of needing some type of long-term care.
• Women require care longer (3.7 years) on average than men (2.2 years).
• 20% of today’s 65-year-olds will require long-term care for more than five years.

From a personal perspective, my mother recently passed away on January 31 after spending three and a half years in a nursing home in southeast Michigan. She was nearly 95 years old. These last few years were especially challenging for her, but she generally received very good care from the staff and doctors. However, she also had two previous nursing home stays — one for over eight months after neck surgery, and the second for nearly three months after a mild heart attack. While some of these costs were covered through Medicare, as will be discussed below, the vast majority was paid through my mother’s financial resources.

Nursing home costs, especially for a private room, are expensive and persistent. Many life insurance companies have some type of cost estimator for the type of care that a person would like to receive (i.e. private room, semi-private room, assisted living, etc.) by state and/or region. For example, New York Life estimates that the cost of a private room at skilled nursing home in the southeast Michigan area will average over $129,000 per year. A semi-private room would have an average cost of nearly $117,000 per year. If we were to assume that a person would need long-term care in twenty years, these costs adjusted by 3% annual inflation would rise to $233,000 and $211,000 per year, respectively.

Many people are of the opinion that Medicare will cover the costs of long-term care. However, Medicare is only intended to pay for a maximum of 100 days if you require skilled services or rehabilitative care. To qualify, you must be over 65 years old and have had a hospital stay of at least three days. Medicare will cover 100% of the cost for the first 20 days, but the patient or their family are responsible for a co-pay of $176 per day (for 2020) for the next 80 days. After 100 days, 100% of the cost is borne by the patient or their family.

In order to defray these additional costs, there are a few options to consider:

Traditional Long-Term Care Policies

Some people elect to purchase a stand-alone long-term care policy to help pay for some or all of the cost. The best time to purchase such a policy is between ages 50 to 74 years old. Typically, the earlier that a policy is initiated, the lower the potential premium costs. Many of the policies will have a maximum fixed pool of benefits, an initial elimination period where costs are covered by the insured or their family, a maximum monthly payment amount and an inflation adjustment factor. For example, consider a 65-year-old who is in generally good health. The annual premium for such a policy would be nearly $4,100 with a monthly maximum benefit of $7,000 per month, a 90 day elimination period and a maximum total benefit of $250,000 (adjusted for inflation at 3% annually). These factors can be adjusted and vary based on age and health condition.

The drawbacks of long-term care insurance include premium increases over the life of the insured that can be significant, and the possibility that a person could pay premiums for life without ever using the coverage provided by the policy.

Long-Term Care Annuity

Another approach is to purchase a long-term care annuity. The annuity provides long-term care benefits at a multiple of the initial investment amount (premium). In this approach a person makes a larger one-time premium payment. For example, a 65-year-old could make a premium payment of $100,000 with compound annual inflation protection of 5%. At age 66, this policy would provide long-term care benefits of $360,000 and nearly $418,000 at age 70. If the person never uses the policy, the $100,000 would be returned to their heirs.

Hybrid Long-Term Care Policies

A hybrid long-term care policy combines the benefits of a life insurance policy with long-term care coverage. If long-term care is required, the policy will pay benefits toward those expenses. The long-term care benefits paid are deducted against the life insurance death benefit over time. If long-term care is never needed, the life insurance death benefit will be paid out at the policy owner’s passing. Similar to the annuity, a larger up front premium is typically required to purchase these policies.

Self-Insure

Some people may choose to forgo any type of long-term care coverage and rely on their portfolio resources to cover any potential costs. Such a plan may be prudent, but should be a conscious decision after weighing the different options as listed above.

Long-term care policy premiums are considered a qualified medical expense for purposes of calculating your medical deductions. Keep in mind, you are only able to deduct the amount of your total medical expenses that exceed 7.5% of your adjusted gross income.

A health savings account (HSA) can be used to pay policy premiums with certain maximum amount limitations based on age.

We would welcome the opportunity to prepare some examples of how long-term care costs could potentially impact the sustainability of your portfolio.

Also, while considering costs is important, it is also critical to have created a healthcare power of attorney so that someone else can make medical decisions for you if you are not able to do so. In a similar way, an advance directive can help guide your family with end of life decisions.

The discussion of long-term care is not comfortable for most people. But given the significance of the costs and the desire to provide the very best care possible for yourself and other family members, it is important to have a candid discussion with your key advisors including your attorney