Handling Long-Term Care Needs Before They Arise
Some people are lucky to accumulate wealth because they are in the right place at the right time. Others are unfortunate and lose assets because they are in the wrong place at the wrong time. Doctors obviously don’t believe in relying on luck to build wealth. If they did, they wouldn’t spend so many years in training. Would it surprise you to learn that, after all that hard work to build careers in medicine, most Doctors ultimately leave their wealth accumulation and asset protection to chance?
We are not saying that Doctors don’t work hard after they get into practice. To the contrary, the opposite is true. Doctors work too hard when they need to be working smarter. This chapter explains how Doctors can efficiently protect themselves from long-term care risks, get a valuable tax deduction, and preserve their valuable retirement assets. This is a key to working less, as it allows a retiring Doctor to quit practice with a smaller, yet more effective, safety net!
Before we discuss long-term care insurance and how to most efficiently purchase the right policy for you, we need to first see how big a risk the expenses associated with long-term care really are.
Why Is Long-Term Care A Big Risk?
According to the AARP Research Report on Long-Term Care (Ari N. Houser, AARP Public Policy Institute, October 2007 (http://www.aarp.org/research/longtermcare/ternds/fs27ritc.html)), on average, two-thirds (69%) of people over age 65 today will need some long-term care. The average duration of need, over a lifetime, is about three years. Women live longer and have higher rates of disability than men, so older women are more likely to need care (79% v. 58%), and, on average, need care for longer (3.7 years v. 2.2 years).
In the U.S., the average stay in a nursing home is between two to three years. In some areas of the country, the cost of nursing home care or quality around-the-clock in-home care may be $200-$300 per day. This means that the average home healthcare stay costs between $150,000 and $320,000. Additionally, the U.S. Health Care Administration reports that costs are increasing 5.8% per year and are expected to more than triple in the next 20 years. At these projected rates, the costs may be between $500,000 and $1,000,000 by the time you or your spouse need long-term care. Are you sure that you, your parents, and your in-laws all have hundreds of thousands of dollars in “extra” funds within your retirement and estate plans to cover this highly plausible expense?
In some parts of California, the cost of living is well above the national average, and so the cost of long-term care is also substantially higher than the national average. Within the state, there can be vast differences between urban and rural areas, with the urban areas being more costly. According to a Genworth Cost of Care study released in April 2008, long-term care costs in California increased as much as 44% over the past five years. The increases are, in part, due to a shortage in the health care workforce to care for the growing number of elderly people.
Costs of in-home care are significantly higher and can amount to $150,000 to $320,000 per year. These costs will continue to increase at disproportionate rates because of the growing number of baby boomers in need of care over the next 30 years.
Long-Term Care Insurance (LTCI) covers health insurance costs for those people who cannot take care of themselves. These costs may include nursing home care, in-home care, and many other expenses. This chapter will explain why and how the most financially astute Doctors make long-term care planning a high priority in their planning. More specifically, this chapter will discuss the need for LTCI, why is often overlooked, why the government won’t help you, what types of coverage exist, and how they can help you.
The Need For Long-Term Care Insurance (LTCI)
There are two basic reasons why many Americans may need to obtain long-term care insurance. First, modern advancements in medicine, science, and technology have helped to increase the average life expectancy of people. Predictably, with this increased life expectancy, there is a greater chance that people may suffer a debilitating illness that will require them to seek significant long-term care. Even though medicine keeps people alive longer, there are still incurable diseases that don’t kill you, but will leave you requiring assistance. Neurological disorders like Alzheimer’s are perfect examples. An Alzheimer’s patient could need significant care for 15 or 20 years before dying. These advances in medicine can come with a hefty price tag for some people.
With the trends of increasing life expectancies, in conjunction with the increasing costs of medical expenses, long-term care will impact an increasing percentage of the population and can be very expensive. Doctors are aware of the increased life expectancies and rising medical costs, but need to be consciously aware that long-term care costs can easily wipe out retirement savings and eliminate any inheritance you would have otherwise left for children or grand-children (or would have received from your parents or in-laws). When armed with the right information, Doctors can make the decision to include LTCI in their comprehensive plans and work with their advisors to do so as cheaply and efficiently as possible.
In addition, having a plan for long-term care demonstrates a desire to have quality care in the event it is needed and represents a financial prioritization of that desire. Having a system in place will make it more likely that necessary care and assistance is provided earlier. Children of aging parents often delay getting help because they are concerned about how it will be afforded. According to the National Census Bureau (2006), the average national income is $48,201 and adult children may be ill-prepared to spend from their own income for supplemental care and reluctant to request spending from their parents’ funds to obtain the needed help.
An AARP Study, Valuing the Invaluable: A New Look at the Economic Value of Family Caregiving (June 2007), found that the contributions of family caregivers often go unnoticed, but in fact their contributions are the backbone of the nation’s long-term care system with an estimated economic value of $350 billion in 2006. The study concludes that, “the unpaid services family caregivers provide are not without costs to the caregivers and society. Lost time at work, lost benefits and declining health can add to the emotional and physical strain of actually caring for a loved one. The study underscores the need to better support family caregivers through programs that provide respite (a break from caring), tax credits, information and other supports.” Having a plan in place makes it easier to get needed care earlier, without creating additional stress and financial strain on family members or other loved ones.
Why Most People Fail To Secure LTCI
Before we discuss the various types of LTCI policies, it is important that we address some reasons as to why LTCI is not often a part of people’s financial plans. In this section, we will answer the following questions:
· Why won’t the government cover these long-term care costs?
· Why don’t most people have LTCI?
Why Won’t The Government Cover These Long-Term Care Costs?
To many people’s surprise, the government will not cover long-term care costs the way people would like them to. Did you know that in California, an individual does not qualify for LTCI coverage unless his net worth is LESS THAN $3,000? In addition, once that individual begins receiving LTCI benefits, the state takes all but $30 per week of income from the patient. Many Average Americans and all Doctors would have to spend every last dollar of their savings before they could receive any health care help. Even if you may have more than enough saved to pay for these types of expenses, your potential health problem could wipe out your entire inheritance, which you had hoped would go to your children or grandchildren.
Incidentally, many of our clients buy LTCI policies on their parents, because they know they will have to take care of their parents if the need arises and they want to make sure that it does not affect their financial status. After all, such unplanned expenses could result in a major financial disaster and emotional problem. Imagine if you are getting ready to retire and suddenly one of your parents or in-laws gets sick and needs $75,000 to $150,000 per year of medical expenses. Unfortunately, this will most likely be paid with after-tax dollars if you do not plan accordingly and have LTCI.
Why Don’t Most People Have LTCI?
You may also be surprised to learn that many people do not have LTCI. However, many people do not want to bear the risk of self-insuring their long-term care costs. So why haven’t more people purchased LTCI? In one word: ignorance. We see clients insure their lives, homes, cars, and income, but not events (like long-term care and disability) that have the next highest probability of occurring in one’s lifetime (behind only death). Why? It could be an “it’s not going to happen to me” mentality. It could be a false sense of security that Social Security will take care of things. It could also be frugality—that is, some Average Americans may not want to pay LTCI premiums for the next 20 to 40 years with only a 50% chance of getting a benefit from the insurance.
Types of LTCI Policies
Now that you know why you need an LTCI policy, you need to know what you should look for in such a policy. Common types of policies include:
Traditional LTCI Policies: Traditional LTCI policies feature benefits, options, and riders that vary in availability and scope among carriers. These traditional policies do not have cash value, nor do they have a death benefit. Once a person becomes eligible for LTCI benefits, (inability to perform two of six Activities of Daily Living), the traditional policy pays a daily reimbursement for approved expenses up to the maximum daily benefit chosen by the insured. Upper and lower limits vary among carriers but are in the $20-$300 per day range. Benefits can be received for life or for a period of time, as determined by a total insurance dollar value of the policy, often referred to as “the pool of benefits.” “Facility-only” or “facility and in-home care policies” are also available. Elimination periods (deductibles) apply and can range from 0 days to 90 days.
Other features, options and riders that vary among carriers are inflation protection, bed reservations, alternative plan of care, restoration of benefits, personal care advisor, respite care, joint policy discounts, premium waver, rate classes, non-forfeiture benefits, indemnity benefits, caregiver indemnity benefits, and 10 year paid-up, 20 year paid-up, and non-level payment options.
A major resistance to purchasing traditional LTCI is the possibility of paying long-lasting premiums, in conjunction with the fact that a person may never actually use the policy’s benefits. If this is the reason you do not have LTCI, one should seek a carrier that offers paid-up policies and/or non-forfeiture riders. Paid-up policies will require yearly premiums for a specified number of years, usually 10 years or 20 years. After this time, premium payments stop and the insured owns the policy for life. Non-forfeiture riders allow the policy owner to name a beneficiary and, upon death, all premiums that have been paid are then paid to the named beneficiary, even if benefits have been received. However, the policy must be in force at the time of death for the beneficiary to receive the paid premiums.
Universal Life Insurance Policies: A different method of addressing long-term care needs is to purchase a Universal Life Insurance policy with an attached rider that can accelerate all or a portion of the death benefit to be used for approved long-term care costs should the need arise. Benefits are received in much the same way as a traditional long-term care policy. This requires a single premium payment and purchase of a paid up policy. In most cases, an existing cash value policy can be exchanged with no tax consequence (consult your tax professional regarding your particular situation). The larger the single premium paid, the larger the death benefit that can be converted to daily benefit maximums for approved long-term care costs divided over a two-year, four-year or lifetime period at a decreasing daily maximum amount. The policy can be purchased to provide benefits for an individual or couple.
Asset-based LTCI Policies: Some companies offer LTCI policies that allow people with assets to invest those assets and secure leveraged LTC coverage (about 4:1). These policies are unique in that they pay regardless of outcome: If you need coverage, it’s there; if you cancel your coverage, you get your assets back; if you never make a claim and pass away without needing they policy, your children will inherit the assets you invested. When wealthier individuals have the funds to invest in this sort of policy, it can be a no-lose proposition.
Overall, the most important feature of a good LTCI policy is a financially sound insurance carrier. Do not consider purchasing the cheapest LTCI policy that you can find. LTCI carriers must have the financial strength to sustain their ability to pay claims well into the future, when the millions of baby boomers will begin needing LTC benefits. In a nutshell, don’t be pennywise and pound foolish.
Using LTCI To Protect Your Retirement Income
Would you consider paying for your LTCI premiums if you could do so in a tax-deductible manner and do so over a finite period, like five or ten years? Would you consider paying for LTCI if you knew that your heirs would receive every dollar of that premium at a later date?
Most baby boomers are saddled with the problem of having to take care of their children, themselves, and possibly their parents. The biggest financial disaster that can effect your retirement is that you, your spouse, your parents, or your in-laws suffer significant health problems and do not have a sound financial plan. The omission of a LTCI policy for family members would certainly destroy your retirement and any inheritances that might exist before the illness arose.
As established earlier in this chapter, the cost of long-term care for one person can be hundreds of dollars per day. For this reason, many physician clients don’t just purchase long-term care insurance on themselves and their spouses, but they also buy long-term care insurance on their parents and in-laws. This is a growing trend we are noticing with our younger clients. They are buying LTCI policies on their parents and in-laws as a way to take care of their parents and protect their own retirements. There are many different bells and whistles to consider and a variety of LTCI payment options, which range from single payment to 10-payment, 20-payment and life-pay programs. Regardless of the payment option you choose, remember it is essential that you buy a LTCI policy so that you can avoid financial disasters and protect you and your family’s assets and retirement income.
Increasing medical costs and increasing life expectancies have led to ballooning spending on medical-related expenses. The reduced benefits of social insurance leave this increased burden to individuals and families. The impact of this expense can be devastating. Hundreds of thousands of dollars per year can be spent on long-term care. With a mental illness that could last ten or more years, the cost to a family could be millions of dollars. For retirees on a fixed budget, this could bankrupt them. For physician families, long-term care expenses could unnecessarily decimate the bulk of an estate. Luckily, LTCI is available and can be purchased through a corporation to make it more tax efficient. To learn another way to make sure that you, your parents, and your in-laws don’t run out of money in retirement, you should read the next chapter as well.