How to help the elderly and their family members prepare financially for long-term care issues.
Marie Cadwallader Draper had been discussing long-term care insurance with one of her clients, but he was procrastinating.
The client waited too long. "He just got diagnosed with prostate cancer," says Cadwallader Draper, with California Fringe Benefit in Orange and Del Mar, Calif. "Now he can't get the insurance. Life is easier when you have better planning in place. You never know what's going to happen."
When it comes to planning for elder care issues, delaying is common. Denial, while temporarily relieving people's discomfort, only causes more problems - including financial ones.
Karen Schaeffer, who runs Schaeffer Financial with her husband, Rick, in Silver Spring, Md., has seen how devastating it is for people without plans. "When you have a parent with advanced Alzheimer's and you're worrying about money, it's pouring salt in the wound," she says.
Schaeffer says it's essential for people to address health issues before they get sick. "It doesn't get better if you wait. It just slams doors on tools," she says. "I use anecdotes. Some people are motivated by fear, so I tell horror stories."
Long-term care expenses are enough to scare anyone. The average yearly cost of care in a nursing home is $44,100, according to a March 2000 study by the American Council of Life Insurers in Washington, D.C.
By 2030, it is projected to be $190,600. Assisted living is $25,300 annually, and the 30-year projection is $109,300.
To cover the cost of long-term care, clients have three options: They can go on Medicaid if they're at poverty level, purchase long-term care insurance or they can self-insure.
Medicaid: Full of Restrictions A state-administered health program for low-income people, Medicaid only pays for nursing home care. To qualify for the benefits, people used to hide assets or spend them down. But the laws have changed.
Amendments passed in 1993 lengthened the look-back period that could disqualify a person for Medicaid. "Normal transfers go back 36 months. Putting assets in trust goes back 60 months," says Sam Van Why, academic associate with the College for Financial Planning in Denver.
Another law was passed in 1996. "It included the `Send Granny to Jail' provision making it a misdemeanor for an individual to transfer assets to qualify for Medicaid," Van Why says. A 1997 legal change made it a federal misdemeanor for an adviser to recommend transferring assets. However, in 1998, Attorney General Janet Reno stated the Department of Justice would not enforce this.
Chris Cooper, who runs Toledo, Ohio-based financial planning firm Chris Cooper & Co. and ElderCare Advocates, a geriatric-care management company, stays within the law. "I don't want to be a test case," he says. "Transferring assets is illegal. A married couple is at greatest risk - they get penalized longer."
Even if someone does qualify for it, Medicaid is no picnic. "I tell people it's welfare," says Carlos Vasquez, a financial adviser with Signator Financial Network in Bethesda, Md. "What do you expect to get? Not home care, not an assisted living facility, but the next available bed in a nursing home. In Maryland, if you live in a nice city, you can be sent to a slum in Baltimore."
Another potential danger with Medicaid is the state coming after the individual's estate. Van Why provides an example. "If a mother and a son are co-owners of a house, and the mom [on Medicaid] dies, the state may put a lien on the house," he says.
Insurance: Chronic Care Solution The safest way to prepare for the financial risk of long-term care is to purchase insurance. "If you can afford it, and if you can get it, it's a no-brainer," says Randolph Shine, of Shine Financial, a Royal Alliance firm in Deerfield Beach, Fla.
Most people who require long-term care don't need medical help, but assistance with activities of daily living such as bathing, using the toilet, eating and dressing. With insurance, clients have a choice of in-home care, assisted living, nursing home care or any combination.
There's an art to designing a policy, says Kevin Ehlers, a financial planner with American Express Financial Advisors in Sun City, Ariz. He interviews clients to determine what they want. "I say, `Picture your spouse requiring care. Can you, Mrs. S., put your husband in the bathtub, change him? Would you want someone to come into your home or go into a care facility?'" Ehlers says including home care in the policy gives the ill person some options.
Don't overdo the coverage, advises Greg Seal, who heads Seal Financial Services in Denver. "A lot of people are overinsured," Seal says. "You don't need to cover the entire risk; just part of it. If the client is very wealthy, he may want to go to a private facility and get a private room. He can use the policy to fly coach and use his money to upgrade to first class."
The strength of the insurer is a key consideration. "I would definitely look for at least an A+ AM Best rating of the company," Van Why says.
If long-term care is needed, the insurance more than pays for itself. "If you pay a $3,000 annual premium from age 60 to 80, that's one year's worth of long-term care cost," notes Cadwallader Draper.
Individuals don't have to buy the insurance themselves. Corporations can accelerate premium payments to fully cover a beneficiary in 10 years, says Peter Calfee, an RIA who runs Calfee Financial Advisors in Cleveland.
"It can be fully paid for, and the premium is deductible, and the benefits are tax-free," Calfee says. "It's a powerful technique for retirees who sit on boards. I've covered a number of generations that way."
Self-Insurance: An Expensive Option Advisers can't say exactly how much money is needed to self-insure or whether it's really a good idea. "If clients have $2 million to $3 million, we look at self-insuring," Seal says.
At the same time, Seal wonders if clients will be willing to spend the money. "If you have to buy a [nursing home] room with two beds for your husband because he can't share a room, it's $240 a day. That's $7,000 a month," he says. "That puts a chill through the wealthiest person."
Schaeffer says very wealthy people are often self-insured, but they're taking the chance of depleting their resources. "Even if there is enough money, it's scary going through $8,000, $9,000, $10,000 a month in home care," she says.
For a client with $10 million in assets, self-insurance may be the way to go, Calfee says. For others, he recommends outside policies. "For a few thousand a year, you can hedge with a long-term care policy," he says. "When you make an investment decision, are you willing to invest $30,000 to save $750,000?"
Family: Caring for Parents Although adult children don't have a legal obligation to take care of their parents, they often feel an emotional or moral responsibility.
Denise Yuu, a rep with Salomon Smith Barney in Hartford, Conn., works mostly with 40- to 60-year-olds - the sandwich generation. She finds that adult children are willing to help older parents fund long-term care insurance. "The children kick in to make sure they're covered," she says. "Everybody rests easy when mom and dad are taken care of and have a choice of facility."
When Schaeffer deals with boomers, she regularly asks about their parents' plans for long-term care. "If a senior family member is not getting adequate care, I know I would pay," she says. "Would they rather pay the insurance premium or take the bet? They can hedge the bet with long-term care insurance."
There's no denying that elder care planning is a sensitive topic, so start the discussion early, Cadwallader Draper advises. "Promote long-term care insurance when they're young and healthy."
Even then, it can be touchy, Yuu says. "People think you're being nosy. Try to use anecdotes. Present it; don't push it. It's in their best interest - let them come to the conclusion."
Four states are piloting an innovative program that helps older people hang onto their assets and still use the Medicaid program.
New York, California, Indiana and Connecticut are participants in the Partnership for Long Term Care. This partnership between government and insurers gives individuals access to long-term care insurance, allows them to go on Medicaid and keep some assets.
Denise Yuu, a broker with Salomon Smith Barney in Hartford, Conn., certified for the Connecticut Partnership program, says clients purchase a Medicaid Asset Protection long-term care policy. "You spend $15,000 on the premium, and you get two years of coverage worth $131,400," she says. After that, the person goes on Medicaid but gets to keep $146,400 in assets.
This strategy is useful for married couples since it keeps the healthy spouse out of a vulnerable financial position, Yuu says.
If your clients qualify for long-term care insurance and can afford it, taking out a policy is a prudent way to hedge the risk of long-term care costs.
Paying the Premiums Below are the average annual premiums for long-term care policies with three or six years of assistance in the home, community, an assisted living facility or a nursing home. It includes compound inflation protection of 5% a year. The premiums were collected from four, large long-term care insurance companies.
Choosing a Policy There are some basic considerations when choosing a policy, according to Phyllis Shelton, an insurance industry consultant who runs LTC Consultants in Nashville, Tenn.
One important criteria is that the policy is tax-qualified - benefits are tax-free. "You have to need help for 90 days or longer, and you have to need help with at least two daily activities," Shelton says.
- Daily or monthly benefits - Daily care ranges from $40 to $500 a day. Monthly ranges from $1,000 to $8,000 a month. "Look at the average cost in your area," Shelton says. "Sometimes just room and board is $140 a day. Having medicine and supplies averages 20% more."
- Home health care - Shelton says a lot of policies pay 50% for home care compared with nursing home care. "That's a huge mistake," she says. "Home care averages $15 an hour. It's important to get the same coverage for home care."
- Deductibles - The premium varies depending on whether the deductible is 20, 60, 90 or more days.
- Length of benefit period - Two years, three years, six years, 10 years or for a lifetime are common. The premium for lifetime coverage is 30% more, Shelton says. People who are married don't have to have the same coverage. Women live longer.
- Inflation coverage - This is important. "If you have a $100-a-day policy and it costs $300 when you need it, that's a problem," Shelton says. "It's better to have a three-year period with inflation than unlimited without inflation."
Deducting a Premium Long-term care insurance premiums can be added to a person's medical expenses and are tax deductible if expenses exceed 7.5% of the adjusted gross income.
Sales Materials MFS Heritage Planning program offers brochures, checklists and other literature on elder care planning issues. Contact: MFS Investment Management, http://advisers.mfs.com (User name: mfs; Password: 1924); 800/343-2829.
LTC Consultants provides brochures, a handbook, seminar programs, marketing pieces and other training materials on long-term care insurance. Contact: LTC Consultants, www.ltcshelton.com; 800/844-4893.
Web Sites American Council of Life Insurers www.acli.org Insurance companies offer research studies and general information on long-term care insurance.
American Society on Aging www.asaging.org Group representing researchers, educators, businesspeople and policy makers shares publications on aging.
Careguide.com www.careguide.net Click on "A Loved One" for resources on finding and funding elder care, including articles, checklists and provider directories.
Eldercare Locator www.aoa.gov/ Government site features Eldercare Locator, a nationwide service to help the elderly and their caregivers find community assistance.
ElderWeb www.elderweb.com Karen Stevenson Brown, a CPA and long-term care consultant, offers professionals and family members information on medical, legal, financial and housing issues.
Mr. Long-Term Care www.mrltc.com Martin Bayne, an elder care advocate, aims to educate people on the long-term care problem and to find a public/private financing solution.
National Association of Elder Law Attorneys www.naela.com Group for lawyers and bar organizations offers information and resources, including an attorney referral service.
National Association of Professional Geriatric Care Managers www.caremanager.org Practitioners' site includes Web links to care management resources and a referral service to care managers.
National Council on the Aging www.ncoa.org Group promotes dignified aging with its site of news on aging-related legislation and other elder care topics.
Senior Alternatives for Living www.senioralternatives.com Advertisers list retirement communities, assisted living centers, nursing homes, Alzheimer's care and hospice facilities.