This is part of a series. If you have not read the articles that build up to this one, I recommend that you do so first.
- Answering the Question Why About Your Money
- Monkey Brain’s Common Weapons
- Money Comes and Money Goes
- Cracking the Whip on Your Money
- A Contract on Your Life
- What if You Can’t Work (and Not Just From a Lack of Coffee)?
- Don’t Pay an Arm and a Leg to Keep Your Arm And Leg
Just like we don’t like to think about our mortality or the possibility of disability, we hate to think about the notion that we may one day no longer be able to care for ourselves and live independently. I know of many people who swear up and down that the only way they’re going to leave their homes is feet first (although, come to think of it, if you’re walking, don’t you leave the house feet first too?).
Back in the olden days, when farm families grew their own workforces through having children, those extended families would take care of the elderly. Now, though, with workforce mobility and careers requiring people to move to far-flung places, aging adults are decreasingly able to count on their children for support. The percentage of childless women has doubled between 1976 and 2006, from 10% to 20%.
So, while the fiercely independent you thinks that you’ll never need help, the statistics say that it’s otherwise. There are approximately 40 million people over the age of 65 in the United States, and 9 million of them need long term care. That’s a 22.5% chance if you’re age 65 or older, you’ll need long term care.
How much does that long term care cost you if you have to pay for it out of pocket?
In 2019, the average cost for a stay in a private nursing home was $97,452 per year. The average rate for assisted living facilities was $48,000 per year, and the average cost for licensed home health aides was over $20 per hour. If you want to find out the cost of long-term care for your state, Genworth has an excellent website with up-to-date information about the costs where you live.
Now, let’s look at some hard numbers and see what this could cost if you have to get long term care.
The average stay at a nursing home is 835 days. That’s 2.29 years, on average, that a person will stay in a nursing home. 7 out of 10 of those stays will be greater than 100 days, the maximum length of care that Medicare will cover, meaning that 70% of those stays result in out-of-pocket expenses for the uninsured.
If you have to stay 835 days and Medicare covers 100 of those days, you’re left with 2.01 years of a stay, on average, to pay for out of pocket. Given the average cost of a private nursing home, this could leave you with a $209,348 bill to deal with, or, more specifically, for your family to deal with, since you probably aren’t going to be running your own finances if you’re in a nursing home.
The average 65 year old male can expect to live another 18 years and the average 65 year old woman can expect to live another 20 years. According to the AARP, average long term care insurance premiums are (adjusted to 2020 based on inflation):
Assuming a 6.6% annual long term care cost inflation rate, this means that, on average, a 65 year old will pay $170,731.69 in insurance premiums over twenty years – the average life expectancy for a 65 year old female.
Seems like a good deal, right? Pay about $170,732 in insurance to cover a $209,348 bill if you need it.
A 2005 study from Penn State and Georgetown showed a distribution of who actually needed to pay for long term care. I’ve used the 6.6% long term care inflation rate to convert the numbers to 2020 costs.
|Out of pocket long term care costs||Percentage of people turning age 65 who will have to pay that much|
|$26,084 to $65,228||8%|
|$65,228 to $260,835||14%|
|$260,835 to $652,217||11%|
|More than $652,217||5%|
So, chances are pretty good that you would wind up paying more in long term care insurance premiums than you would in actual out of pocket costs – it’s a roughly 84% chance of winning that gamble.
But, that’s not the reason to get insurance. You don’t get insurance because you expect it to pay out. You get insurance to protect yourself if you need it to pay out. It’s the same reason that you purchase homeowners’ insurance. You don’t want your house to burn down, necessitating a claim. But, if it does, then you’ll be glad that you don’t have to stroke an enormous check to cover the costs. 1 in 10 nursing home stays lasts more than 5 years. On average, that would mean that 1 in 10 nursing home stays costs at least $537,396.
What Qualifies for Long Term Care Benefits?
The standards of requiring long term care are generally the same across long term care policies. These are functions of what are known as the activities of daily living (ADLs). There are six ADLs which factor into long term care:
- Eating – is the person able to feed himself without assistance?
- Toileting – can the person maintain get up and go to the bathroom or use a bedpan independently?
- Transferring – can the person move from a bed to a chair without assistance?
- Bathing – can the person bathe alone?
- Dressing – can the person put on and take off clothes independently?
- Continence – can the person maintain his or her bowels?
Most policies state that the covered individual is eligible to receive the benefits of the insurance policy when unable to perform 2 (and sometimes 3) of the abovementioned ADLs. Some policies lump toileting and continence together, so do not be surprised if the policy addresses only 5 ADLs. Additionally, a doctor has to certify that the beneficiary is chronically ill and expected to remain unable to perform those ADLs for at least 90 days.
Determining if You Need Long Term Care Insurance
There are two extremes at which you do not need long term care insurance. The first end of the spectrum is if you will have fewer assets than is required to qualify for Medicaid. Each state sets its own income limits for Medicaid, with many states falling below the 100% threshold for poverty, which, in 2019, was $1040.83 per month. Some states will allow incomes as high as $2,130 per month (unfortunately, the federal government hasn’t updated this number since 2013). States will also require low asset thresholds, usually set at $2,000 in assets – which include all assets except for one car, a house with under $500,000 in equity ($750,000 in some states), and life insurance with a face value of $1,500 (again, the federal government hasn’t updated this number since 2013).
Therefore, to be eligible for a Medicaid nursing facility, you will need to nearly bankrupt yourself to get there. Furthermore, while being in a Medicaid nursing facility is arguably better than being left to your own devices or out in the street when you need nursing care, the quality of care in Medicaid nursing facilities is arguably suspect. In 2006, 90% of all Medicaid certified facilities were cited for at least one violation of an OBRA 87 Medicaid/Medicare standard and almost 1/5 of the facilities were cited for a deficiency which could cause immediate jeopardy or harm to the residents of the facilities.
I would not want my parents to be in a Medicaid facility if I had any other option, and you should avoid one if at all possible. My grandmother was in a good Medicaid facility, and, while passable (and our family was fortunate), it was not nearly as high of a quality facility as other grandparents and great grandparents have lived in.
The other possibility for avoiding the need for long-term care insurance is if you have sufficient assets to self-insure.
The number you’re trying to solve for is how much you would feel comfortable spending to pay for long term care while still maintaining an asset and income base sufficient to support the remaining spouse. Since, according to the previously cited Penn State study, 5% of instances of long-term care cost more than $652,127, I recommend using between $700,000 and $800,000 as a threshold. We’ll discuss how to keep long term care costs in check later. The reason that I use that number instead of twice that number – which would be if both spouses required long term care in excess of $652,127 – is that the chances of both spouses requiring such significant costs in care is 2.5 per 1,000. If you can afford the extra $1.4-1.6 million, then that’s even better, but it’s rare enough to not require excess sacrifices in your life to get there.
The reason that you need to account for those costs above and beyond the assets you need to meet your regular, ongoing expenses in retirement is that the other spouse still needs a place to live if one spouse needs to move into a nursing or an assisted care facility. Some assisted care facilities allow spouses to live together, but some do not, and in the cases where the well spouse is not able to join the spouse who requires care, they’ll still need to maintain a separate household. Thus, you need the excess assets to pay for the additional long term care costs, because they will be incremental to other spending rather than replacing spending.
Thus, to self-insure, your family would need to be able to still maintain a safe withdrawal rate with $800,000 less in assets than you would have at age 65 and retain your desired standard of living. If you’re there, self-insure.
If You Need a Long Term Care Policy, What Do You Look For?
There are many options to look for within a long term care insurance policy. Here are the ones that you need to pay attention to.
Almost every policy nowadays which is issued is tax qualified because it meets certain federal standards. It’s important that your policy is tax qualified because, if it is, you can potentially deduct your premiums off of your income taxes, if those premiums exceed 7.5% of your AGI and are within age-adjusted premium limits set by the IRS. More importantly, your benefits, if you need to claim them, are provided tax free.
The services which are provided under a long term care policy could run the gamut from nursing home care to household help to clean and cook. There will be tradeoffs; the more options you choose, the more expensive your policy will be.
I recommend getting a policy with at least the following:
- Nursing home care
- Assisted living care
- Home health care from a licensed professional
- Home health care aides / chore worker services (if you are single)
I don’t usually recommend hospice care because Medicare covers most hospice care stays. I also don’t recommend respite care because that is a service which can be paid for out of pocket, as needed, on occasion.
Home health care is important to have covered, as it should be cheaper than a full nursing home stay and can lower the total amount spent on long term care. This will leave more total benefit available for full nursing home care if required, and, in general, people are more comfortable being treated at home than they are being treated in nursing facilities.
Benefit limits are either set up in terms of a dollar limit (daily, weekly, or monthly limits) or a percentage limit – similar to a copayment with health insurance. It is important that you find out what the average costs of care facilities where you are living or are going to be living so that you know how much coverage you’ll need. You will also need to determine how much of an additional contributory payment you can afford to make (e.g. the “copayment”) to understand how much coverage you need. A rough formula for calculating your “copayment” is
(Total assets X safe withdrawal rate) – (your annual expenses) = How much you can afford in an annual “copayment”
This term means that once you have a long term care policy, as long as you continue to pay premiums, your insurer cannot drop you. It is possible, though, for your insurer to raise premiums if they do so for your entire age group.
Policies usually offer inflation protection, either 3% or 5%. Since the inflation rate for long term care far exceeds the overall inflation rate, it is typically wise to get this rider unless it raises the cost of the insurance by more than the actual inflation rate it is guaranteeing.
This is like a health insurance deductible but for long term care. It is the period of time which you must pay for the long term care before the policy benefits kick in. The elimination period can range from 0 days to 100 days. The elimination period clock stops if you stop receiving care, but does not reset like a deductible for a health care policy. So, if you have a 90 day elimination period, receive 45 days of care, recover, and then later, need care again, you’ll pick back up at day 46 rather than starting over at day 1.
Why Medicare for Long Term Care Isn’t the Answer
Unfortunately, too many people who are on Medicare think that Medicare will pay for long term care only to find out that they aren’t covered.
The only time that Medicare will cover a nursing home is in the following condition:
- You’ve been in the hospital for at least 3 days prior to entering the nursing facility
- It’s medically necessary (e.g. changing sterile bandages, helping with rehabilitation, etc.) and prescribed by the hospital or your doctor upon discharge
- Your entry into the nursing facility must be tied to the reason you went into the hospital, and
- You must be en route to recovery. Maintaining the same condition becomes custodial care, which is not covered by Medicare.
Furthermore, Medicare doesn’t foot much of the bill. Here’s what you pay:
- Days 1-20: $0 per day
- Days 21-100: up to $170.50 per day in 2019
- After day 100: all costs
In order to reset the Medicare payment clock, you have to be out of a hospital and a skilled nursing facility – in other words, not receiving care at all – for 60 days before reentering.
Given that a skilled nursing facility costs between $200 – $222 per day, you’re not getting that much help from Medicare after day 20, as, in 2019, you could be liable for $13,469.50 in the two and roughly two thirds months that Medicare still continues to cover you, and after that, Medicare does nothing for you.
Alternative Payment Methods to Standard Policies
You’ve probably read about the recent spate of increases in long term care insurance rates. Even though the insured has to sign a form which states that they’re aware that policy rates can go up, when they do go up, the insured has probably forgotten about that form.
There is a way to lock in the rates, if you can afford it. That is through single pay long term care policies or limited pay long term care policies. They work very similarly.
In a single pay long term care policy, you make a one time payment for the policy, and you’re done. No more payments. You’re covered as long as you live.
In a limited pay long term care policy, you are paid up after a fixed number of years (usually 5 or 10 years). As long as the rate guarantee matches the premium payment period, rates won’t increase.
If you can afford the payments, this is the way to go, as you won’t be hit by rate increases in the future.
Why a Longevity Annuity is Not the Right Option
I have also seen some arguments that say purchasing a deferred annuity is a better option because the money paid out in a deferred annuity when the purchaser reaches a certain age (usually age 80) is not just limited to long term care, but can be used for anything – food, clothing, entertainment, that last joyride around the world, whatever.
Here’s the problem with this approach.
There’s no coverage in the intervening years. What if you’re a 60 year old who buys a deferred annuity for $500,000 to pay out at age 80. That $100,000 would provide about $8,500 a month in income payments at that point. What happens if you develop Parkinson’s at age 62? You will need the care, but won’t have the assets to pay for it.
While I’m a fan of annuities in the right situation (which we’ll discuss in a later article), in this case, I am not a fan of purchasing deferred annuities in lieu of insurance.
When to Get Long Term Care Insurance?
There is no true right answer for this question. The ability to get long-term care insurance coverage depends solely on your personal health, not your family medical history (although, if you can get a policy through your work or your credit union without a medical exam and you have a history of health problems, jump on it). Therefore, if you’re healthy, you’ll qualify for a lower rate and have a lower chance of not receiving coverage. By locking in a healthy rate, you’re put in that group for the rest of your life, even if your health subsequently declines.
The biggest argument for buying long term care when you’re younger is that rates increase approximately 9% per year in age that you’re older when you apply. This isn’t a straight line increase, but a reasonably close approximation for how much more per year that you can expect to pay by waiting.
Rarely will you find guaranteed investments which pay you that much back.
Thus, by starting younger, you’ll actually pay less in real (i.e. inflation-adjusted) dollars over time, and you’ll be covered for a longer period of time. 37% of long-term care needs occur in people under the age of 65.
For that reason, I recommend looking at long term care insurance as young as age 45, and certainly no later than age 60.
If you’re interested, New York Life has a great worksheet for figuring out the costs of long term care and how much insurance you should purchase.
The next article in this series is Investing Doesn’t Mean Playing the Markets.