Personal Finance Essentials
Long-Term Care: The Risk Most People Ignore
70% of People Over 65 Will Need Long-Term Care
Most Have No Plan to Pay for It
Long-term care insurance is one of the most important and most overlooked elements of financial planning. The reason it was rarely discussed in past generations is simple: people didn’t live long enough to need it. There was no such thing as a nursing home problem, because most people never got old enough to face it.
Today, the situation is entirely different. In 1870, only 2.5 percent of all Americans reached age 65. Today, 61 million people are over 65 – and the numbers continue to grow. Seven out of ten people 65 and over will need long-term care for an average of three years. More than half of women and about one-third of men who reach 65 will spend some time in a nursing home. The fastest-growing age group for bankruptcy consists of those over 75.
What Is Long-Term Care?
As our bodies wear out, we find ourselves requiring assistance with daily activities. Insurance companies typically define these as the Activities of Daily Living: eating, dressing, bathing, toileting, transferring (walking or getting from bed to chair) and maintaining continence. When you can no longer manage two or more of these on your own – or when you experience severe cognitive impairment such as Alzheimer’s disease – you need long-term care.
Long-term care does not mean hospitalization. It is primarily custodial care: someone to prepare your meals, remind you to take your medication and help you through the day. This distinction matters greatly when it comes to who pays for it.
Who Pays – and Why the Answer May Surprise You
Surveys consistently show widespread misunderstanding about who pays for long-term care. Thirty-four percent of Americans think their health insurance will pay. Another 30 percent think Medicare will cover the costs. Fourteen percent think Social Security will pay. All of them are wrong.
Health insurance does not pay for long-term care. Medicare pays only under very specific circumstances – it requires prior hospitalization of at least three consecutive days, covers only the first 20 days fully and stops entirely after 100 days. The median cost of a private room in a nursing home is $127,750 per year. An annual stay under Medicare coverage would exhaust benefits in a matter of weeks.
What does pay is Medicaid – the federal program for the poor. But to qualify, you must first exhaust nearly all of your assets. Seventy percent of single nursing home patients spend themselves into poverty after just 13 weeks in a nursing home, according to a congressional report. Half of couples spend their income down to the poverty level after one spouse has spent just six months in a nursing home.
Long-term care is a crisis for the middle class in particular. The wealthy can afford the cost. The poor are covered by Medicaid. It’s those in between – people who have worked hard, saved carefully and built a modest estate – who face the most devastating loss.
Long-Term Care Insurance
Long-term care insurance is the most practical solution for most people. And the most important thing to know about it is this: buy it before you need it. The younger and healthier you are when you apply, the easier it is to qualify and the less expensive the policy. People in their late 40s can typically pay around $700 a year for coverage. By contrast, those who wait until 75 will pay more than $5,000 a year – if they can qualify at all.
Long-term care costs for a 45-year-old are projected to exceed $1.2 million. To self-insure against that risk, you’d need to save $4,732 per year on top of all your other savings. A long-term care insurance policy costs a fraction of that.
When shopping for a policy, look for these key features: at least $350 per day in coverage (which approximates the current cost of nursing homes in metropolitan areas), at least three years of coverage, a 90-day waiting period, inflation protection (compound inflation protection is a must for those under 70), a liberal definition of disability and home health care coverage that matches the benefit for facility care. Avoid buying a policy based on cost alone – cheaper policies have limited definitions of disability and are more likely to include rate increases.
Long-term care is a family-wide, intergenerational issue. Parents who own long-term care insurance protect not only themselves but also their children and grandchildren from having to sacrifice their own careers, retirement savings and college funds to provide care. Research has found that family caregivers are 50 percent more likely to hold their jobs when the care recipient has long-term care insurance. If you won’t buy it for yourself, buy it for the sake of the people who love you.