Protecting Yourself from the Cost of Long-Term Care
In this episode of Your Wealth Curve, I sit down with Susan Kobara of Commonwealth Financial in San Diego, CA, for a discussion on long-term care insurance. Susan joined Commonwealth in 2008 as their expert and primary point of contact for long-term care insurance after working for years in the industry in both policy sales and product development. At Commonwealth, she specializes in helping financial advisors address with their clients the need for protection against the catastrophic risk of health care costs associated with the need for long-term care.
What is Long-Term Care Insurance?
Long-term care insurance provides custodial care when an elderly or disabled person becomes too chronically ill or frail to care for themselves. The decision to buy long-term care coverage can be an emotionally charged one, because of our nature to want to deny that we would should ever find ourselves in a position where we would need it. Long-term care insurance was widely introduced in the marketplace about 20 years ago, making it a relatively new product, and has come about because of a shift in how Americans age. Two generations ago, Susan says, the norm would be for a person to work until they were between 60 and 65 and then pass away a few years later. Now, because modern medicine has given us a much greater life expectancy, people are retiring in their 60s and living for 30 more years or more. People who live to such an advanced age have a much greater risk of becoming frail or chronically ill, or suffering from dementia.
The Myths About Your Long-Term Care Needs
When you ask why you should buy a long-term care policy, Susan says you should consider the answer to the following question: Should I become unable to care for myself when I am elderly how will I make it through those years of my life financially? What is my plan? When coming up with an answer, many people are under the false impression that Medicare will be available to help with long-term care costs. Not so, Susan says, and points out that Medicare does not pay a penny towards the custodial care needed when an aging person becomes chronically ill or frail or suffers from Alzheimer’s. Medicare only pays in the case of hospitalization for illness or trauma and about 100 days of rehab care following. Private health insurance also does not cover long-term custodial care.
Another false assumption people make is that they will have access to Medicaid to cover the costs. Because Medicaid is a part of the welfare system and was meant to benefit the impoverished, it is difficult to qualify for benefits. Plus, Susan points out that Medicaid is overburdened today, which calls into question its stability in the future. Medicaid is limited to nursing facilities only, and does not cover any type of home care or assisted living facility. Susan urges us to locate our local Medicaid-run nursing home and visit to see if this is the type of solution you would want for you or a family member.
If your plan is the expectation that your children or other family member will care for you when you are elderly, think again Susan says. In today’s world, people work and have their own families to take care of, she says. Susan also points out that most people don’t live near their parents today, making it difficult or impossible to step in when care is needed. “A long-term care event does not bring families closer together,” Susan says. “It tears families apart.”
The Cost of Long-Term Care
Depending on the level of care needed and the quality of your accommodations (private room, etc.) the cost of the average nursing home is between $80,000 and $120,000 per year and rising, according to longtermcare.gov. The average nursing home stay for an Alzheimer’s patient is 8 years, Susan says, costing upwards of $800,000 to $1 million. This can certainly throw a monkey wrench in your financial plan and can decimate your portfolio if you are not prepared, Susan says.
The cost of an average long-term care policy is about $2,000 per year, according to longtermcare.gov, but varies according to your age at the time of purchase, the policy type, and kind of coverage you select. Compared to the cost of long-term care, which doubles every 10 years Susan says, buying coverage seems well worth it. The time to purchase coverage, according to Susan, is in your early 50s. It is then when it seems people have some cash freed up from obligations like child care and college costs to put towards this kind of insurance. It is also important to purchase coverage while you are still in relatively good health, as one in four people will be denied coverage because of health, Susan says. Waiting too long may also be costly because of the rising long-term care insurance premiums as carriers raise prices to keep up with the number of claims, which is on the rise due to longer life expectancy.
Types of Long-Term Care Insurance Policies
There are three types of long-term care policies available through multiple carriers. The first and the most common is a traditional policy, which can be designed depending on three stipulations — length of coverage, daily benefit amount and level of inflation protection. When deciding on coverage, Susan says your financial advisor will ask you what a palatable premium is per year and then design your policy around that.
The second type of policy is a life insurance policy with a long-term care rider. This policy is an attractive option to people because everyone considers life insurance an essential type of coverage. Susan urges people to consider the following when looking at this type of policy — that once the long-term care benefit is triggered, it comes out of your policy’s death benefit, leaving your beneficiaries with what is left. Also, these types of policies can be expensive and are limited in their daily long-term care benefit.
Third is what is called a limited benefit policy, which is an annuity-type product with a long-term care rider. This type of policy requires a large initial investment, but the cost of the long-term care rider is less expensive than a stand-alone policy. Plus, if you don’t need long-term care, the money is available to you to use as you wish. For example, if you purchase a policy with a single premium of $100,000, you retain access to that money whether you need long-term care or not. You pay a fee for the long-term care rider, typically around 2 percent of the investment, but would then have access to double the investment amount for use for long-term care.
The bottom line when it comes to long-term care, Susan says, is that planning is essential. If you need long-term care and you do not have coverage, your options are few or none. “People now are living much longer,” she says. “We have to take care of our families by taking care of these needs.”
Click here to read Susan Kobara’s essay WhoMovedMyWealth (3)