Long term care insurance is surfacing in more retirement planning conversations these days. The harsh realities of getting old and the impact that this might have on the money we have is an important discussion. LTC insurance may be worth considering.
For additional information on this and other insurance topics
Be sure to check out this radio interview Paul Petillo did with long term care insurance expert Jesse Slome
Okay, maybe I didn't convince you in my previous column to leave the cost of college to the years when your child is still in your home, growing and expanding his or her horizons. Maybe I didn't explain the costs of saving for your child's college will, if you are of a certain income, and surprisingly many of us are, will cause you to be cash poor at a time when you should be saving for your retirement. Maybe I failed at alleviating the guilt that accompanies the inability for you to simply write the check sending your offspring off to four years of higher education.
If I did, then we need to look at something that more than a few of us will face in the upcoming years and whose cost may just astound you into rethinking your plans.
Your parents, or your spouse's parents, if they are still alive, are getting older by the day. If they are living on their own, managing to lead full lives without your assistance, count yourself among the fortunate. But there are some things that you should know. There is a 50% chance that it will not continue. Their freedom to move about or live alone could be compromised at any time. A simple slip or fall, a gradual descent into dementia, or just the advance onset of old age can change the picture for them, as well as for yourself. There is a better than likely chance that they will not be able to live alone for their entire life. What kind of plan have you set aside for that consequence?
Folks are getting older. And with old age comes a wholly different set of circumstances that have financial repercussions. The population will increase by 25% over the next 25 years but those who will be elderly, will increase by 65% in the same time period. That isn't taking into consideration the advancing age of the Baby Boomers. But this isn't about our aging, it is about our parents.
Assisted living, which is comprehensive of nursing homes as well as independent living facilities are not, by any means, cheap. Currently there are about 800,000 seniors using assisted living facilities provide many of the necessary services that they need, with extras such as hair dressers for an extra fee. The average cost of this type of residence is $2,400. Compared to the average price of a nursing home at $4,200 per month, this seems down right inexpensive. Many seniors will chose to join a continuing care retirement center first while their health is still good enough to live alone but among their peer group. the costs of these vary from center to center but typically provide a condominium style living with services provided such as meals and house keeping.
Many times the burden of paying these costs falls squarely on the children of these seniors. granted, these costs are offset somewhat with the sale of a home, Social Security income or other retirement accounts. There are tax deductions to those that pay more than 7.5% of gross income. If you provide support for your parents in excess of 50%, you can also take the deduction. This type of deduction may push you into the alternative minimum tax bracket, which is the hidden punch in the groin as a result of last year's Economic growth and Tax relief Reconciliation Act which reduced marginal tax rates while leaving ATM rates intact. If you are unsure of what ATM is, feel free to write me.
While there are many options for financing from selling the senior's home or creating a reverse mortgage, one that is gaining growing attention, is long term care insurance. This gets a little complicated, so bear with me for a moment.
Insurance, as we all know, is basically a policy against disaster. It could be for fire, auto, earthquake or flood. Many of us carry health insurance and life insurance. All of these policy are designed to help in the event of a catastrophe, which is something we hope will never happen. But growing old and needing help to continue with a quality life is inevitable for half of those that reach old age.
The policy itself, like every policy should be well understood by you before you purchase it. Well understood does not mean that the agent, whose commissions are quite high, has explained it to you. He is extremely biased no matter what he tells you. Bring as many of your family members in on the decision. Many policies do not pay for the first two to three months of the stay, with the average stay in a nursing home lasting just shy of two years. It is a way to provide some sort of economic independence while taking care of the climbing costs of not only the care home, but the medical expenses and prescriptions.
Policies pay for the day-to-day costs, but with abundant loopholes than may take more than a few cursory glances to find. Some policies have such strict disability criteria that many policyholders who need help do not qualify for benefits. Other policies narrowly define qualifications so that insurance company doctors, who are given bonuses for controlling costs, can overrule the medical orders of a policyholder's private doctor. Even when policyholders qualify for benefits, many will learn that their coverage has been out-paced by inflation.
The industry also realizes that the cost of the policy's premiums, which are not fixed, continue to rise to the point of unaffordability just about the time the policy is most needed. This causes many seniors to drop the policies due to fixed income restrictions. Add the unscrupulous sales practices and high commission rates (30% to 65% in the first year) and you have a recipe for high profits.
An AMEX Assurance Company pamphlet tells buyers, "Your nursing home stay is covered when your doctor certifies that it is appropriate." This is as far from the truth as you will get. In the fine print, of which there is an abundant amount, the policy clearly states that the company, not the policyholder's doctor, makes the final decision whether the policyholder qualifies for benefits. The abuses from this industry continue to go mostly unchecked.
So based on the fact the burden of your parents care may come from their assets, then yours. Medicaid, which is really designed for patients who have no assets. pays for about half of all nursing home bills. Medicare does not pay for long term coverage.
So should you buy a policy for your parents? Maybe, but only if you can do so without causing yourself financial hardship, although you may find yourself in a position of paying for care anyway. maybe, but only if you plan on keeping the policy until their death. Too often, with the increased premiums brought on with advanced age, policies are dropped at just the time they are needed.
How do you figure coverage? Use the Rule of 72 and base it on the cost of the average nursing home costing between $75 and $250 per day. The Rule of 72 is a simple formula allows you to determine the length of time it will take for a price to double at a given rate of interest. Assuming a nursing home near you charges $100 per day and that nursing home charges will increase at an annual rate of 6% per year. How long will it take the price to reach the $200 level? The answer is calculated by dividing the number 72 by the interest rate. Seventy-two divided by six gives a quotient of 12. Assuming a six percent rate of inflation, the $100 a day charge will double in 12 years. If your parents are 60 years of age and you are purchasing a policy with the expectation that they may need nursing home care in their early seventies, you should be looking for a policy that will be paying benefits of at least $200 per day twelve years from now. Some policies are offered for less if the patient receives in-home care. It is all in the fine print.
Should you decide on a policy, there are several things that add or subtract from the cost. The elimination period, which is the time before the policy comes into effect, will change the premium significantly. The longer it takes for the policyholder to use the policy, the less the cost. For instance, waiting 100 days is much less expensive than a policy that begins to pay on the first day of care. Be sure to get inflation protection. Buy a policy that uses a compounded method with automatic increases avoiding the "simple interest method". For example, in a 5% simple inflator policy the coverage on a $100 daily benefit would increase by five dollars every year. At the end of fourteen years the daily benefit would be $170 dollars, but if the company used the "compound interest" method, at the end of 14 years the daily benefit would be close to $200 [72 divided by 5].
By no means do I recommend that you purchase this type of insurance. With any luck, your parents have some assets to cover these costs, or their health is not something that is of immediate concern. But expect this to be the next big guilt trip laid on the common wage earner in the coming years a the population continues to age. By all means ignore the temptation to purchase this type of insurance for yourself or your spouse. Saving rigorously now will help you when need it, should the time ever come. A typical premium for a 50-year-old person for a policy that covers a $100 daily benefit, four years of coverage and includes a five percent compounded inflation protection, is about $850 annually. This same policy for a 65-year-old is about $1,800 annually; for a person aged 79, the cost is about $5,500 annually. These cost can be controlled in a number of ways, all of which require you doing more than just a little homework.
