One of the most stressful and difficult financial decisions is planning for possible long term health care expenses. Individuals of all ages struggle over how to provide for the possibility of significant long-term health care costs. Should they buy long-term care insurance? If so, how should they pay for it? Are there other options?
Nursing home care is expensive. It costs between $2,100 and $6,000 monthly, depending on where you live, and the cost is rising faster than inflation. That comes to $25,200 to $72,000 annually. Some nursing homes cost over $100,000 annually. If you don’t want to touch principal, that means a conservatively-invested sum of $400,000 to over one million – more if you want inflation protection.
The odds of you or your loved ones having to incur this expense are rather low. In general, a 65-year-old has a 43% chance of spending time in a nursing home at some point. That sounds high. But about half of nursing home stays are for 90 days or less. Most of those expenses are for rehabilitation after an injury or illness and are covered by Medicare. Three quarters of nursing home stays are for less than one year.
Only 9% of nursing home stays are for five years or more. Women dominate this group by a ratio of three to one.
While the odds of spending time in a nursing home are less than most expect, that still means you have a 25% chance of spending more than a year in a nursing home and a 9% chance of spending five years or more there. These figures also don’t include the growing number of people who use significant home health care services or who enter assisted living facilities. Home health care can be more expensive than nursing home care, and assisted living is amost as expensive.
Fortunately, you can use a combination of strategies to finance long-term health care if the need should arise.
Medicare is the first payment option. It will cover most short-term nursing home stays that are for rehabilitation after an illness, injury, or surgery. But it won’t cover longer-term stays and those that occur because of physical decline or chronic illness rather than a need for rehabilitation.
Medicaid will cover long-term nursing home stays. But to qualify you must be “impoverished.” There are strategies available in which people can meet Medicaid’s definition of poverty without reducing their current standard of living. Unfortunately, Medicaid doesn’t pay much for nursing home care. Nursing homes that accept primarily Medicaid patients generally offer lower quality care than other nursing homes. You probably don’t want Medicaid to be an option if you can afford other options.
Long-term care insurance is the next available financing tool. Current insurance policies provide good coverage. You can cover both home care and nursing home care, up to a daily limit. You can get inflation protection to ensure your policy retains its purchasing power.
But insurance is expensive. Premiums for a married couple each age 65 can be about $2,000 annually for each spouse. The longer you wait, the more expensive the annual premiums become.
Many people wait until they are past 65 under the theory that they’ll spend less on premiums over their lifetimes. But about 25% of people will be medically unqualified to buy long-term health insurance at age 65 and later. If long-term care insurance is part of your program, you should buy it at age 65 or earlier.
Because of the cost of insurance, not everyone should buy it. If your net assets are $100,000 or less, you probably cannot afford the insurance. You are better off using your money to maintain your standard of living and counting on other sources to pay for long-term care. In expensive areas of the country, the asset level can climb to $250,000.
If you have over $450,000 in assets ($1,000,000 in expensive areas of the country), you probably don’t need insurance. You likely have enough assets to self-insure for long-term nursing home stays without depriving your spouse or heirs. Those with asset levels between these two groups should consider insurance if they have enough income for the premiums without crimping their lifestyle.
You also should buy insurance if preserving your assets for your spouse or heirs is of primary importance. You might never use the insurance, and the premiums might crimp your lifestyle. But the bulk of your assets will be preserved if you need long-term care. Also consider insurance if you have a personal or family history that indicates you are likely to need long-term care.
You can reduce the cost of insurance by selecting the right policy terms. For example, don’t have the policy coverage kick in until you have been in a nursing home for 90 days, six months or even longer, instead of from the first day. Use Medicare or your assets to cover shorter periods. Also, don’t pay for lifetime coverage. Have the policy benefits limited to five years, or even less.
You should opt for what is called “flexcare.” The policy pays, but at a lower daily rate, if you opt for home care or assisted living instead of nursing home care.
Your next choice of financing is to self-insure. That means tapping your sources of income and investment assets to pay for long-term care not covered by other sources. The big advantage is that if you don’t fall into the minority that needs substantial nursing home care, then you don’t lose assets on premiums for a policy on which you don’t collect. Instead, you retain the assets to maintain your standard of living and to leave for your loved ones.
Most of you have time to accumulate assets to cover long-term care. Long-term care generally isn’t needed until age 79 or later. But self-insuring means that you cannot invest solely for income. You should have a portion of your assets invested for growth to keep up with the ever-growing cost of long-term care.
As part of your self-insurance, don’t forget a reverse mortgage. A reverse mortgage lets you tap the equity in your home without selling it. The reverse mortgage also leaves your other assets intact for the next generation. I covered details of the reverse mortgage in the January 2000 issue.
There are a number of options to pay for long-term care. Most people should plan to use a combination of these financing tools. Use Medicare or your own assets to pay for short-term needs. If more care is needed, buy insurance, plan to use Medicaid, and self-insure. Consider a reverse mortgage for stays of six months or longer. Carefully assess the likelihood that you will need care. Then put together a plan that will cover different situations without reducing your standard of living or depriving your loved ones.