Affordable Strategies for Extended Care Funding

There’s a gap in the knowledge of many financial advisors, and their clients, when it comes to planning for the consequences of needing extended care.

You can avoid that gap by helping clients understand the financial implications, and by informing them that there may be insurance solutions that are more affordable and more accessible than they think.

Why own insurance?

Costs of extended care are high, with national median costs ranging from $20,000 annually for adult daycare, to over $100,000 annually for nursing home expenses.

Even costs at the lower range can significantly disrupt family finances if there is no insurance.

Low-income families have Medicaid to help with access to extended care services, as insurance solutions are likely unaffordable.

Wealthier individuals have a broad range of insurance solutions available to help mitigate the financial risks associated with extended care.

They are often only shown the “high-end” solutions, which they may deem too expensive for what they are willing to pay.

When it comes to insurance, a wealthier client’s budget is not based on what they have available to spend; it’s based on what they are willing to spend. Many comprehensive plans exceed that willingness.

Modest or middle-income families are more challenged because their income and assets may be too high to make Medicaid a viable alternative; yet, perhaps not high enough to make owning traditional long-term care insurance an affordable option.

How much insurance is meaningful?

Financial advisors have historically focused on higher-benefit insurance plans, meaning both the premiums and the buyer’s incomes were higher.

Sure, when we need to use insurance, more benefits are always appreciated, but striving to own more benefits can make the insurance cost more than we are willing to spend.

This ‘all or nothing’ mindset keeps too many people from owning important protection that will have a positive impact on their families, and on their care.

Some wealthier clients may be interested in a hedging strategy where a smaller policy can buy the family time to prepare for future self-funding needs.

This avoids the need to immediately adjust spending, as well as reduces the need for an immediate “fire sale” of an asset to generate funds to pay for care.

Consider that nearly half of Americans will use paid long-term care services for less than one year.

This means owning insurance protection of $20,000, $50,000 or $100,000 may be more than adequate to help reduce financial stress and an immediate cash flow disruption.

As a result, there has been a trend toward lower-cost, lower-benefit insurance plans to help pay for extended care costs for up to one year.

The advantage of offering smaller benefit amounts can be seen in many employer-sponsored long-term care insurance program.

Such programs often see employees choosing maximum benefit amounts between $20,000 and $100,000.

There is an increasing realization that owning protection covering say, six months to one year of paid care, allows families to avoid a financial crisis — a crisis that comes at a time when they are also emotionally addressing the declining health of a loved one.

And even if the benefits of a short-term care plan are exhausted, owning some protection can provide families of all incomes with time to prepare for longer-term funding needs.

Obstacles remain.

Don’t know/don’t want to know: One in three individuals over the age of 40 incorrectly believes Medicare will cover custodial care needs and long-term care.

This lack of education often means they do not confront this planning until it confronts them when a loved one needs care.

And regardless of income, people tend to avoid this planning conversation.

They don’t want to think about their health declining or becoming dependent on others for their daily care.

Many have ill-conceived notions about the full consequences and likelihood they will need care.