If we look back through history, we’ll note that caring for those who became elderly or disabled was handled far differently than it is today. In the late 1800’s and early 1900’s, most people worked either on a farm or in a factory. People worked until they physically couldn’t, and then they would retire. They lived out their few remaining years at home, passing away typically within 10 years of retirement. If they became sick, developed cancer, had a stroke, broke a hip, had pneumonia, etc., those illnesses or disabilities either lead to an imminent demise, or the residual effects substantially shortened their life expectancy. The family unit was structured much differently then, relative to today. It was common to have 3 generations living within a few miles of each other, or potentially under one roof, so caring for mom or dad (If they did become elderly or disabled), was easier. If there was a need for nursing home care, the inflation adjusted cost was a fraction of what it is today.
Virtually every aspect of the issues mentioned above are different today. People live far longer now than in the past; which makes us more likely to become infirmed and disabled. When we do become sick and disabled, medical technology is able to keep us alive far longer than in the past. When we need assistance, the family unit is smaller, much further dispersed, and far busier than in the past, which makes it harder to provide care. When it is time to go to a nursing home, the cost is not only larger than the past, but so high that it jeopardizes our financial wherewithal.
Issues to Consider
A vast majority of the financial plans we work with can survive a long-term care illness if care is needed after the age of 80. The real financial danger to your financial plan is if you or your spouse gets sick when you’re in your 60s or 70s, as the added cost of care can severely damage even the best financial plans. It’s this scenario of becoming disabled when you’re younger that we must guard against the most.
For many of your families, the thought of putting you in a nursing home is the last consideration; but the changes to the family unit in the last 100 years makes caring for you more difficult. It’s not as easy for family members to provide care, as the majority are either dual income, or single member families that work. In addition, family members have become more dispersed, frequently living in different cities or states, which makes providing care to sickly family members more difficult.
Traditional Long-Term Care (LTC) Insurance
The insurance industry created an insurance product, LTC Insurance, that will pay for care if you meet certain criteria. Although the premiums have gone up substantially in the last decade it’s still a consideration. The main price driver to these policies is the cost of living inflation adjustment (COLA) that will keep the benefit growing over time. One solution is to purchase a policy with a large monthly benefit, but with no inflation rider. If you need care when you’re younger, this policy will be able to pay a substantial amount of the cost. If you need care when you’re older, the policy will pay a benefit, but not as large of a percentage if you became sick at a younger age. Policies without this COLA rider are much more affordable than ones with it.
Many people purchase Whole Life Insurance policies when their kids are young to replace income in the event of an early demise. After the kids are grown and the traditional need for life insurance diminishes, it’s possible to re-purpose whole life policies to address LTC. The simple scenario is to leave the policies intact, pay for any long-term care expenses out of pocket during your life and, upon your demise, use the death benefit of the life insurance as a means to replenish any end of life expenses incurred.
A second solution is to move the cash value of an existing life insurance policy to a new life insurance policy which has a long-term care rider. Frequently these policies allow you to access some multiple of the death benefit during your lifetime for LTC expenses. If you don’t need to access the policy during your lifetime for a LTC expense, your beneficiaries would receive the death benefit upon your death. Keep in mind that you would need to be reasonably healthy and insurable for the new insurance company to issue this policy.
Pay Out of Pocket
How to pay for care is another consideration. For most people, most of their assets are tied up in IRA/401k accounts and residential real estate. Remember, every withdrawal from retirement accounts is subject to Federal and State Income Tax. As a result, you typically need to withdraw $100,000 to pay for $70,000 of care; which means that your large retirement account won’t pay for as much as you think. As for real estate, you can always sell or refinance your home to pay for care; but this is typically an undesirable alternative.
If you’ve planned well and been able to save money in a brokerage account, this account is more tax advantaged than an IRA. Even still, selling securities to pay for LTC care would typically generate capital gains taxes.
We’ve heard countless people joke about ‘alternative ways’ they would deal with LTC. Leaving your spouse at the curb in their wheelchair with a ‘Free’ sign draped around their neck in hopes someone would drive by and pick them up sounds funny when you say it; but the reality is no one would do this.
Understand that every person has a long-term care plan. For most, that plan is simply a hope and a prayer. More important than the financial ramifications of getting sick, consider the impact on your family in trying to care for you. Even if your family is only coordinating caregivers, this task can be enormous. Speak to your family members about your plans and intentions if you get sick or disabled. When the time comes, you’ll all be in a better position to deal with the unfortunate.