Many people don’t want to talk about planning for long-term care.
But it’s critical that planning for such costs be part of every comprehensive financial plan, says Rona Loshak, a founding partner of Karp Loshak Long-Term Care Insurance Solutions Brokerage.
According to Loshak, who spoke recently about this topic at the AICPA’s annual conference, there are four main reasons why that’s so.
Yes, there was a drop in average life expectancy due to Covid-19. But, for the most part, thanks in large part to medical advances and healthier lifestyles, Americans are living longer, said Loshak in an interview with Retirement Daily.
In fact, in the U.S., after age 65, the average life expectancy is 85, according to the Social Security Administration. And affluent Americans tend to live even longer.
And the longer you live, the more likely you’ll need long-term care. In fact, once a person reaches 80, there’s an 80% chance they will need long-term care in their lives, according to Loshak.
And the longer you live, the more likely the following will happen:
- You'll live alone;
- You'll fall or develop chronic conditions; and
- You'll be on a reduced income, especially while maintaining a home and lifestyle.
Another factor to consider is that women live five years longer than men, are more likely to get Alzheimer’s, have 10 times greater chances of reaching age 85, and at the age of 65 are twice as likely to be living alone, according to Loshak.
“The longer you live, the more likely you'll need long-term care,” she said. “And the more likely you'll be living alone. And when you live alone, the more likely it is you'll need help. You'll have to bring in some help or possibly go to assisted living to get that help.”
Many older Americans, and especially women, will become what Loshak calls “solo agers.” They will grow old without a spouse, or children, or stepchildren.
And what will happen to older Americans who need help but don’t have adult children who live nearby? Or their adult children are unable to provide care because they have busy lives, careers, and children of their own to tend to?
And what if there’s a blended family? According to Loshak, second marriages for both generations cause issues when care is needed. “What happens when there's a blended family is: no one's in charge,” she said. “Everyone's in charge. Gray divorces have caused a lot of long-term care issues.”
Limited Government Programs
A large percent of baby boomers (among those 40 and older, it’s 49%, according to a recent survey published by the Associated Press-NORC Center for Public Affairs Research) expect Medicare, Medigap, and health insurance to pay for extended care.
They do not. Those programs pay for skilled care only, such as preventative and rehabilitative care to help with acute medical conditions, according to Loshak.
Medicare, for instance, covers up to 100 days of care in a skilled nursing facility (SNF) each benefit period. And if you need more than 100 days of SNF care in a benefit period, you will need to pay out of pocket. In essence, custodial, supervisory and unskilled care is all paid out of pocket.
Of note, long-term care, on average, is required for 3.9 years and for patients with Alzheimer’s, the average care need is six years or longer.
Other people think they will use Medicaid to pay for long-term care. But it’s not easy to qualify for Medicaid. There are two triggers: financial and medical.
The medical triggers are much harder to qualify due to limited Medicaid resources and the higher level of care that is required to qualify, according to Loshak.
And the financial trigger is based on your income and assets. Medicaid is free for those who have nothing. But there’s a cost for those who have assets and income. To be sure, many older adults think they can transfer and spend down assets to qualify for Medicaid. But those efforts come with many unintended consequences.
What’s more, there’s now a look-back period of five years. This means that your state will count any assets you transferred in the past few years when determining your eligibility, according to Medicare Interactive. And if Medicaid determines that you transferred assets in violation of the Medicaid rules, it can penalize you by not paying for part or all of your nursing home stay.
“The whole program has changed,” said Loshak. “It's managed by Medicaid. Not only are there long look-back periods for nursing homes, but also to get home care.”
Bottom line: Medicaid has its place but it’s not for the mass affluent and the super affluent. “It’s there for the people who need it the most,” she said. “And those are the people who are (living at) the poverty level.”
The True Cost of Self Funding
The old rule of thumb would have you use Medicaid for long-term care expenses if you had less than $100,000 in assets and self-fund those costs if you had more than, say, $2 million in assets.
But, according to Loshak, there are costs to funding long-term care out-of-pocket that few consider.
For instance, self-funding may actually increase the cost of care. Liquidating retirement assets, stocks and mutual funds all trigger income taxes. For instance, you might need to sell $125,000 of investments to cover an $85,000 nursing home bill and the taxes due on the sale of the investment. By contrast, someone who purchases an asset-based long-term care insurance with the money they would have otherwise invested will receive tax-free benefits.
And two, there’s an opportunity cost. By self-funding, you forfeit the potential for future appreciation on liquidated assets.
In effect, for every $1 of care you receive when self-funding, you are actually spending $1.54 of your own money when factoring in such things as income taxes and opportunity cost.
It’s not a cost per se, but buying a stand-alone long-term care insurance policy instead of self-funding also provides a pool of money to use immediately for long-term care, plus it leverages your cash outlay, said Loshak.
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