Long-term care planning hits close to home for many of us. Most people have either direct experiences with loved ones declining health necessitating moves to assisted living or nursing facilities. These indelible experiences leave lasting impressions of the emotional toll and financial burdens involved.
Planning for long-term care is vital but difficult. The anxiety of honestly facing our mortality and decline of health can hinder even starting the conversation. Once underway, the planning only grows more complex because a person’s long-term care plan lies at the intersection of finances, family, health, values, and goals.
My hope is to give you an idea of Bluestem Financial Advisors’ philosophies and approach: how we help clients navigate these difficult conversations, craft their own long-term care plan, and achieve peace of mind.
Starting The Conversation: When and How
For many clients, the optimal time to start the conversation is sometime ahead of retirement — ages 55 to 65. At this age, most people are healthy enough to obtain Long-Term Care Insurance and premiums would be more affordable at these ages. Furthermore, since funding long-term care boils down to resource management, the decision of when to retire can impact a person’s ability to fund the costs of care.
A plan is only as strong as its foundation: a person’s goals, values, and attitudes. We start first by seeking understanding through discovery. This consists of an open dialogue with questions like:
What are your prior experiences with long-term care and how have they shaped your outlook?
What are some of your primary areas of concern or uncertainty?
Are there any health-related concerns that might impact future care? How about your family history of health concerns, or on the other hand, longevity?
In an ideal long-term care scenario, what would care look like to you? Where is care provided, by whom? How will you know when care is needed?
What does your local support network (family, friends, neighbors) look like? What would their involvement be?
If “future you” were able to look back on your long-term care stay, what would a successful long-term care plan have looked like? (family, finances, care, etc.)
Do you have any long-term care or life insurance already in place?
Let’s illustrate the importance of understanding by comparing two widows who both wish to age in place, receiving care in their home. At face value, you would assume their long-term care plans would be similar, right?
Through our dialogue, we find that the first widow lives in a two-story home far from family and friends. It’s her childhood home, which she’d inherited after her father’s long battle with Alzheimer’s. Her long-term care plan might include cash planning for accessible home renovations, building a care network, and funding plans for extended care needs.
The second widow lives in a single-story accessible home just a couple blocks away from her daughter. She loves her daughter’s daily visits and they have a close relationship. The daughter wants to provide for her mother’s care, and if needed, have her mother move in with her. Our second widow’s long term care plan would be radically different than our first widow, despite the high-level goal of aging-in-place being identical.
With a clear understanding of a person’s goals, values, and attitudes, we shift towards reviewing what funding long-term care would look like.
Funding Long-Term Care
Here are a few interesting statistics related to long-term care needs:
70.0% of all adults turning age 65 will develop a severe long-term-care need in their lifetimes.¹
Of those adults who have developed a severe long-term-care need, 40% have the need for no more than two years and 22% have such need for 2-4 years.¹
The projected average duration for a long-term care need of is higher for women (3.6 years) than for men (2.5 years).²
Note: Severe long-term-care need, and long-term care need are used interchangeably herein and is defined as: (1) having difficulty with two or more Activities of Daily Living (ADLs) expected to last at least 90 days or severe cognitive impairment; and (2) receiving unpaid care from family or friends or paid care.
The takeaway is that while common, most cases are end-of-life and limited in duration. For those scenarios, our primary concern is whether funding care needs would exhaust resources to the point of putting the surviving spouse’s finances at risk. Or, in the case of single clients, if resources would be exhausted entirely. There is also the potential that care needs extend beyond the common scenario. For older adults who have developed long-term care needs, the duration of those needs lasts at least six years 23% of the time, and at least eight years 14% of the time.¹
Long-term care costs vary wildly depending on location, level of care, and length of stay. With the understanding gained from previous conversations, we can derive an approximate cost of care under someone’s ideal care scenario. For general cost estimates, Genworth’s Cost of Care Survey is very useful.
It's evident that between varying care options, costs, and duration of needs, modeling a care scenario and funding plan can be difficult, but should be tailored for every unique situation. Developing a long-term care funding plan involves understanding its impact on resources, the risk of exhausting those resources, and the potential life and financial adjustments needed to manage that risk. For those concerned about exhausting resources, we often use insurance to provide a buffer period to provide time and flexibility to make adjustments.
The Basics of Long-Term Care Insurance
Going into any long-term care planning discussion, it’s important to understand some of the basics about long-term care insurance. Long-term care insurance has evolved over the years, and there are many types of policies to choose from. Here, we will explore some of the basic terminology and key coverage provisions common across long term care insurance policies.
Daily Benefit
The daily benefit is the amount the insurance policy will pay for your care each day. To manage premium costs, we typically recommend aiming to cover around 50% of expected long-term care costs. Why only 50%? Lifestyle adjustments can make up the difference. For example, less travel, downsizing your home, and reducing non-essential expenses can all help bridge the gap. By strategically planning for these adjustments, you can keep your insurance premiums more affordable while still being prepared for long-term care needs. Of course, long term care insurance is not a one-size-fits-all matter. Covering 50% of expected costs may not be appropriate for everyone, so it’s important to form coverage recommendations within the context of the broader plan.
Compound Inflation Rider
Inflation can significantly erode the value of your long-term care benefits over time. A 3% compound inflation rider ensures that your daily benefit increases by 3% each year, compounding annually in exchange for a higher premium. Without this rider, the real value of your policy might diminish drastically over time.
For instance, suppose you have a policy with a $150 daily benefit. Without inflation protection, that $150 might not cover as much in 20 years due to rising care costs. However, with a 3% compound inflation rider, your daily benefit would grow to approximately $271 in 20 years, maintaining its purchasing power.
Elimination Period
The elimination period is akin to a deductible; it is the number of days you must pay for care out-of-pocket before your policy begins to pay benefits. Typically, the longer the elimination period, the lower the premium. Common elimination periods range from 90 to 365 days. By opting for a longer elimination period, you can significantly reduce your policy costs. However, this also means that you need to have sufficient savings or other resources to cover care costs during this initial period.
Benefit Period
The benefit period is the length of time your policy will pay for care. While lifetime benefits were once common, most carriers now offer policies with benefit periods ranging from three to five years. While this might not cover the worst-case scenario of needing care for 10 years or more, it provides a substantial period during which you can make necessary lifestyle and financial adjustments. For many, this coverage is a reasonable compromise between cost and benefit.
Shared Care Benefit for Married Couples
For married couples, a shared care benefit can be an attractive feature. This option allows couples to share their individual benefits, effectively doubling the potential pool of resources. For example, if both partners have policies with a three-year benefit period, they can access up to six years of care between them, depending on their needs. This flexibility can provide additional peace of mind and financial security.
Downsides
Some of the downsides of buying policies include:
Cost: Premiums for LTCI can be high, especially if you purchase a policy later in life. They can also increase over time. While insurance companies do need approval from insurance regulators to hike premiums, it can happen. Historically, many policyholders have seen significant premium hikes as insurers underestimated their payout rates. In some cases, policyholders are offered options to adjust their coverage to manage premium increases.
Changes in healthcare landscape: The healthcare landscape is continually evolving, with new ways to provide care emerging over time. There's a risk that older policies may not cover these newer methods of care, potentially leaving policyholders with inadequate coverage for the most current treatments and services.
Going Beyond the Numbers
Beyond funding the costs of long-term care, there are many other aspects of the plan that ought to be discussed and planned for in advance of the long-term care need. Below are some topics of conversations and considerations that we help our clients navigate over time.
Housing
Deciding on aging in place (in-home care) vs. assisted living facilities
Planning for home renovations to prepare for aging-in-place
Readying a home for sale ahead of a move to an assisted living facility
How to fund “buy-in” payments to assisted living facilities
Downsizing possessions ahead of a move
Cashflow management to support costs of care
Estate Planning
Reviewing estate documents to confirm key roles in the event of incapacity
Impacts that a long-term care stay could have on legacy goals for heirs
Communication
Ensuring that your wishes for care is clearly defined
Discussing the prudence of sharing and clarifying plans with those involved with the care plan
Conclusion
Long-term care planning is a multifaceted process that requires careful consideration and proactive decision-making. By addressing financial resources, potential costs, and personal values early, individuals can create a comprehensive plan that offers peace of mind and financial security. At Bluestem Financial Advisors, we help our clients navigate these challenging discussions and craft personalized plans that align with their unique needs and goals. Don’t wait until it’s too late — start the conversation today to secure your future and ensure your care preferences are met by visiting our Contact page and scheduling an introductory call with us to see if we might be a good fit for you!
¹Johnson, R. (2019, April 3). What is the lifetime risk of needing and receiving long-term services and supports?. ASPE. https://aspe.hhs.gov/reports/what-lifetime-risk-needing-receiving-long-term-services-supports-0 (accessed 06/07/2024)
²Johnson, R., & Dey, J. (2022). (rep.). Long-Term Services and Supports for Older Americans: Risks and Financing, 2022. U.S. Dept of Health and Human Resources. https://aspe.hhs.gov/reports/ltss-older-americans-risks-financing-2022. (accessed 06/07/2024)