Long-term care planning has always been a dilemma in my mind. You can look at statistical averages all day long, but in the end it comes down to each person’s individual experience. You’ll either need it or you won’t, and if you do need it you’ll either pay a lot or a little. So the “planning” can range from needing many years of care at a very high cost, to needing no care at all at a cost of zero. It’s equivalent to the possibility of your house burning down. Your house will either burn down, or it won’t. Chances are it won’t. But if it does, it would be devastating financially. So you plan for this possibility by buying fire insurance.
But that’s where the equivalence ends. Fire insurance is affordable, so there is little downside to protecting against an event that probably won’t happen. (In case you’re interested, there is a one in four chance that your house will have a fire large enough to report it to the fire department, according to the National Fire Protection Association.)
Long-term care is a little different. According to a recent Vanguard Mercer study on health care costs, about half of the elderly can expect to pay nothing for long-term care. Another quarter can expect to incur costs of less than $100,000. Fifteen percent can expect costs exceeding one-quarter of a million dollars.
Unlike fire insurance, long-term care insurance is expensive and difficult to obtain. Some people can’t qualify for it. Some people can’t afford it. And some people buy it with the best of intentions only to face premium hikes that render it unaffordable after many years of paying on it. While there will always be a certain number of people for whom long-term care insurance is appropriate, there has to be a better way of planning for long-term care.
One way is to refrain from lumping everyone into one big risk pool (like the insurance companies do; that’s their business). Instead, use a more targeted method of estimating the chances of needing long-term care and the costs of such care. Consider the likelihood of needing long-term care in the first place. Look at the type of care that might be needed, and the duration of such care. Then consider the costs of each type of care. While these factors may not be fully predictable, we encourage you to consider them in the context of your own health outlook and life expectancy and family dynamics that can lead to a closer approximation of long-term care costs.
The official definition of long-term care, according to the Health Insurance Portability and Accountability Act (HIPAA), is the need for help with two activities of daily living (ADLs) for a period of 90 days or longer. The ADLs are bathing, dressing, toileting, transferring (getting in and out of a chair or bed), continence, and eating. The definition also includes the need for substantial supervision for safety reasons due to severe cognitive impairment.
Long-term care can be further categorized as temporary or ongoing. Temporary care might include rehabilitation after a hospital stay or recovery from an injury or surgery. In these instances the individual recovers and no longer requires care. Another example is hospice care where the end of life is imminent. Temporary long-term care costs may be covered by Medicare.
In contrast, ongoing long-term care is many months or even years in duration. It may be triggered by cognitive decline, permanent disability, and other chronic conditions. The most common situation leading to ongoing long-term care is dementia. Stroke, Parkinson’s disease, and osteoarthritis are also common reasons for needing long-term care. Once this type of care is started, it usually continues for the rest of a person’s life.
But HIPAA’s definition of long-term care is not the only type of care that needs to be planned for. Long before a person becomes unable to perform two activities of daily living, they may need help with cleaning, cooking, shopping, and getting around town. These homemaker services are not considered formal long-term care (and are not covered by insurance), but their costs should be incorporated into the financial plan to the extent that there is no family member available or willing to help out.
If you remain at home into your 80s and 90s you will need to budget for these services in addition to your regular costs for housing, food, and transportation. The chart below shows an average annual cost of $45,756 ($3,813 per month) for homemaker services. But the actual cost for any one individual will depend on their needs. A person who hires someone to come in for just a few hours a week will spend far less than this. According to Genworth, the national median hourly rate for homemaker services is $21. If the need is 20 hours a week, the monthly cost would be less than $1,800. With all the meal and grocery delivery services cropping up today, the cost can be even less.
The next step, for those who are unable or unwilling to stay in their own homes but who are still relatively healthy, may be a move to an assisted living facility. The chart below shows an average annual cost of $43,656, or $3,638 per month, for assisted living. But this would include housing, food, some transportation, and housekeeping services in the monthly fee, so it may not be as expensive as it first seems.
A person who wishes to stay in their own home and who needs more extensive care than simple housekeeping may hire a home health aide. These aides offer “hands-on” personal care, but not medical care. The chart above shows this cost to be $46,332 per year ($3,861 per month), but again, it depends on a person’s needs. The national median hourly rate for a home health aide is $22. If the aide only needs to come in for a few hours a day or week, the cost would be far less.
The last step would be admittance to a skilled nursing home at a median cost of as much as $267 per day for a private room. Now we’re talking some real money: nearly $100,000 per year. In planning, you need to ask yourself: what are the chances I will need this type of care, and for how long? The answer will determine the type of planning you need to do. Some may want to set the funds aside or buy some type of insurance, while others may want to take their chances that they will never need this extreme type of care.
The other thing to remember is that if a client does encounter cognitive or physical decline, whether they stay in their own home or move to some type of assisted living facility, spending in other areas, such as travel and leisure, will decline.
And don’t forget about family members, who may or may not serve as a resource. If you have good relationships with your children you may be able to depend on them for housing and some type of assistance. Those who don’t have children, or who don’t want to burden their children, will want to make sure the financial resources are in place so they can pay for the housing and care they need.
In the end, planning for long-term care should be like any other aspect of financial planning—completely customized for based on preferences, probabilities, and projected costs for the type and duration of care that might be needed. Some will want to insure to the hilt. Others would rather take their chances and hope for the best. Whenever we’re working with uncertainties like this, I believe that falling back on general statistics is the wrong approach. Like life expectancy and other matters that can’t be predicted with certainty but that might have a sense about based on their own health experience, genes, and lifestyle, I think the best way to do long-term care planning is to engage with your planner. Lay out the probabilities, costs, circumstances that might point to a need for long-term care (dementia, etc.), and possible solutions (self-insure, LTC insurance, hybrid policy, Medicaid). Once you are informed and have had a chance to think about it, you may be able to come up with a workable plan.
Please give us a call at 215-886-2122 to start the conversation.
|Who Will Need Long-Term Care?
It is difficult to predict how much or what type of long-term care a person might need. Several things increase the risk of needing long-term care.
· Age. The risk generally increases as people get older.
· Gender. Women are at higher risk than men, primarily because they often live longer.
· Marital status. Single people are more likely than married people to need care from a paid provider.
· Lifestyle. Poor diet and exercise habits can increase a person’s risk.
· Health and family history. These factors also affect risk.
Source: National Institute on Aging