Written by: Michael Carbone, CFA, CFP®
Long-Term Care (LTC) support is typically needed if an individual can no longer perform basic activities on their own, including bathing and safely moving across the room on their own etc.
The Long-Term Care Issue:
- Annual out-of-pocket costs for LTC typically range from $70,000-to-$165,000, depending on the level of care needed.
- Medical insurance (e.g., Medicare or a supplemental medigap policy) generally will not pay for custodial care. So, the costs of custodial care will be paid by the family until their financial assets have largely been spent down. Medicaid will step in thereafter if the unhealthy spouse is fit for a nursing home.
- It's important to distinguish between custodial and skilled nursing care. Why? Because healthcare that’s needed as a result of an injury may qualify for some insurance coverage. This is very common given the risk of falls among the elderly. Generally, if a patient is injured or has an acute illness, which results in a hospital stay for 3 consecutive days for the same condition, they may be fully insured by Medicare for a period of 20 days. If care is needed beyond the 20-day period, the patient will be liable for a co-insurance payment through day 100. Again, the services rendered must be for the same injury or acute illness. Furthermore, in some cases, Medicare will pay indefinitely for skilled care rendered at the patient’s home. In all cases, the care is directly tied to the original injury or acute illness.
The Odds of Needing Care:
Today’s retirees have about a 70% chance of needing some form of LTC during their lifetime1. Furthermore, nearly 1/5th of retirees will need LTC for a period longer than five-years. So, while the likelihood of needing care is relatively high but not all cases lead to financial ruin. Why? Because certain scenarios may require minimal out-of-pocket costs. Some common examples:
- Friends and family members may have the means to care for a loved one.
- Custodial care may only be needed for a short period of time.
- If the care is needed due to an injury, the circumstances may allow for Medicare-paid home support.
Considering the relatively high odds of needing care and the costs of receiving it, the potential need for LTC may not be a planning consideration that families should take lightly.
On Protecting Assets From LTC Risks:
There are generally two ways to protect assets from custodial care costs:
- Purchasing LTC insurance
- Changing ownership of personal assets
On Hedging LTC Risks with Insurance:
One way to protect assets from long-term care risks is to purchase an insurance policy which provides the insured person with a pool of money that can be used to pay for custodial care up to an annual limit.
Due to the high likelihood of needing care, this insurance is generally not inexpensive – annual premiums for traditional long-term care insurance may cost in the upwards of ~$10k per spouse depending on how they set up the policy. So, if the insurance goes unused, it will have been an expensive hedge. Alternatively, if the insured couple ends up needing care for an extended period of time, insurance may be life changing.
To put the cost/benefit tradeoff into perspective, couples considering purchasing insurance may consider analyzing:
- How much in future care would be required to break-even on the projected premiums paid on the insurance? How likely is this scenario?
- Might the couple have sufficient assets (and income) to self-insure LTC risks, while still meeting their legacy goals, etc.?
It’s also important to factor a couple’s tolerance for risk, family history, etc. into their decision-making process. Everybody’s situation is different.
Due to the costs of insurance and the uncertainty of needing care, it’s important to consider the potential tradeoffs before making a decision. Nevertheless, LTC insurance can be incredibly powerful for those who can afford to pay the premiums.
On Changing Ownership of Assets:
- Depending on the situation, estate planning attorneys may recommend gifting money into irrevocable trusts to protect assets from long-term care costs. This can be tricky as Medicaid has a five-year look back – meaning if the assets were put in the trust sooner than five years ago, they will still be at risk. Furthermore, trust documents must be written carefully such that the family isn’t considered to have incidental ownership – otherwise, Medicaid may argue that the assets are accessible to pay for care if it’s needed. This is an aggressive strategy as the assets are no longer owned by the couple. These strategies are typically implemented later in retirement – often when it becomes clear that one spouse may be failing. An estate planning attorney will carefully weigh the pro’s and con’s before implementing this strategy.
- Estate planning attorneys often recommend transferring real property such as a home into a “Life Estate”. This a provision in the deed that grants you or your spouse the right to live in the property during your lifetime2. There are pros and cons that an attorney will weigh before implementing this strategy.
How Does a Financial Advisor Fit into Your Estate Planning Process?
- Your financial advisor should help you to understand your vulnerabilities to long-term care risks. They should help you to understand the tradeoffs of purchasing insurance, and whether it’s necessary considering your situation.
- Your financial advisor is often the person who coordinates your estate planning efforts with your legal and tax advisors. A talented advisor will identify potential opportunities to improve your estate plan in collaboration with your estate planning attorney.
- Also, a financial advisor should motivate you to act, as these issues are often easy to push off.
Please don’t hesitate to reach out to discuss these topics in greater depth. I can be reached at 978-455-7799 or Michael.firstname.lastname@example.org.
Thanks for reading!
Michael Carbone, CFA, CFP®
Past performance is not indicative of future results and there is no assurance that any investment strategy will be successful.
Financial and investment planning inherently involve potential tax and legal implications, with which we are generally familiar. We do not, however, practice as lawyers or CPAs and cannot give specific legal or tax advice. You should always consult with your tax advisor, or your attorney, when making complicated legal or tax decisions, however, we’re glad to work with your tax or legal professional to help you meet your financial goals. Raymond James financial advisors do not render advice on tax or legal matters.
Long-Term Care Insurance may not be suitable for all investors. These policies have exclusions and/or limitations. The cost and availability of Long-Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long-Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.
Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.