Funding long-term care

Ironically, while the majority of people willingly transfer the home and auto risks to an insurance carrier, this same majority will choose, often by default, to use their retirement plans as their sole source of liquidity against the much higher long term care risk.

What is the cost?
The common underlying theme of most retirement distribution strategies is twofold: (1) to safely maximize the amounts that are already there and (2) to lose as little as possible in the process of using it. Thus it’s safe to say that wealth preservation is a major goal for most retirees; one simply can’t afford to absorb huge losses.
Unfortunately, poor health can often result in a poor retirement, financially speaking. Numerous studies on post-retirement health care expenses and post-retirement finances have found a significant relationship between declining health and declining wealth.

As is true in most aspects of life, money makes a difference. The problem for most people, at least as it pertains to long term care, is that they don’t have enough of it. The majority of people simply cannot afford these kinds of expenses without financial assistance.

Additionally, while assigning a price-tag to caregiver responsibilities can be elusive, the impact on caregivers’ lives is as much a part of the ‘cost’ of long term care as any monetary amounts.

In February 2006 the New England Journal of Medicine published the results of a nine-year study to quantify caregiver burden, the largest study of its kind. It showed that, in addition to bearing the enormous and devastating financial cost of care, family caregivers are at major risk for their own health and emotional well being as a result of caregiving duties. The risk of heart disease, depression and premature death were all shown to be materially elevated among caregivers.

What are my options?
Obviously, long term care is about more than money. But make no mistake, your client’s ability to finance these costs will determine the quality of care they receive, the number of options available to them, and the amount of control they have over what they get. Ignoring this reality can be a financially devastating form of denial.

Health Insurance: Virtually every health insurance plan in the country, including Medicare and Medicare supplements, routinely excludes custodial care. Since custodial care is estimated to make up 80-90 percent of the long term care provided in America, health insurance clearly is not a reliable funding source for this need.

Medicare: Medicare was never intended, and has not been funded, to pay for LTC in the context in which we know it. In spite of this fact being stated explicitly in the “Medicare & You” guide published annually by the Centers for Medicare & Medicaid Services, every year a disturbingly large percentage of people surveyed on this topic incorrectly name Medicare as the primary payer of long term care expenses. Even the Social Security Administration, at the urging of Congress, recently added wording to their annual statements–sent to Americans age 25 and up–making it clear that long term care expenses are outside the scope of the Medicare program and that individuals need to take responsibility for their own long term care planning.

Medicaid: Medicaid, the health care component of the welfare system, was dealt a serious blow by the Deficit Reduction Act of 2005, lessening its viability as a long term care/planning tool, particularly for middle class and affluent clients. Regardless of one’s philosophy on the practice of artificial impoverishment to qualify for Medicaid benefits, it is becoming overwhelmingly clear that the government is taking concrete steps to return the Medicaid program to its original intended use–as a safety net for the poor.

Long Term Care Insurance: The concept of using insurance as an asset preservation tool is not a new one. Increasingly, LTCI has become a mainstream part of retirement planning and a key component to preserving assets.

Specifically, what LTCI brings to retirement planning is a solid defensive strategy; it protects the integrity of the retirement portfolio by providing a reliable source of tax-efficient liquidity that is separate and apart from the portfolio itself.

In this regard, one could correctly view LTCI as “portfolio insurance” on their net worth. For example, if my net worth is $500,000, a policy that costs $1,750 a year would cost less than one-half of one percent of my net worth per year. Leverage opportunities such as this are rare outside of insurance and applicable regardless of one’s net worth. The notion of spending a couple of hundred dollars per month on insurance premiums versus hundreds of thousands in potential care costs is simply smart money management.

The medical concerns and chronic conditions associated with LTC could ultimately ravage a lifetime of savings. With no other funding mechanism in place, retirement assets become the first line of defense against a risk that is very expensive, very likely to happen and not paid for by anything else.

No one likes to think of themselves as “getting old,” getting sick and needing care, but these things will become a reality for most of us. Carving out a well designed long term care contingency plan for clients to address these issues if they arise should rank high on the retirement planning checklist. Such a plan can provide peace of mind in an era of increasing longevity and rising healthcare costs and can be the foundation for protecting the retirement plan you and your client have worked so hard to build.