Long-Term Care: The Retirement Family's Wolf in Sheep's Clothing

It became clear to me that unless you have so little money that you will qualify for Medicaid, or so much money that you can pay the bills out of your own pocket, you should consider buying long-term care insurance.
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I recently celebrated my birthday, and while another birthday is always better than the alternative (if you get my meaning), as a benefits professional, I can't help but realize that as a continually aging baby boomer, my need for long-term care (LTC) services is becoming a more-real thing for me with every day that passes.

So it was surprising for me to find out that two out of three Americans aged 40 and older are not saving for long-term care, despite studies that show seven in 10 of those 65 and older will need it, according to a poll by the Associated Press-NORC Center for Public Affairs Research. You read it right! Almost 70% of people turning 65 will need such care at some point in their lives!

There is a lot of talk about retirement readiness these days, and outliving one's savings. People need to factor in the potential need for long-term care. What financial resources are available to you? Do you have enough to pay for several years in a nursing home, an assisted living facility, or home health care?

The decision about how to pay for potential LTC expenses is a serious concern for individuals and their families. Unfortunately, with the high cost of LTC, and the high cost of long term-care insurance policies, there is no easy answer. For most U.S. citizens, the costs are increasingly beyond reach. The median cost of nursing home care is more than $90,000 per year, according to a report from the insurer Genworth Financial. One year of visits from home-health aides costs over $45,000 annually. It is estimated that only 5% to 7% of people 45 and older have coverage. Staggering statistics to say the least!

The Associated Press-NORC survey also found that about 25% of Americans mistakenly believe that Medicare or standard private insurance will cover their LTC needs. Remember, Medicare DOES NOT cover what is primarily under the umbrella of long-term care services, that being what is referred to as custodial care. If you're over 65, don't rely on Medicare or private health insurance. Medicare doesn't pay for "custodial care," and private health insurance rarely pays any of the cost of long-term care. In the U.S. today, Medicaid -- the federal-state insurance program for low-income Americans -- pays for some of the long-term care. Some people also may be assuming, incorrectly, that they will qualify for government assistance to help them pay for nursing-home care. Rules are in place to disqualify many who won't meet the strict conditions required.

So, what is long-term care? Generally speaking, long-term care refers to a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs), which are basic actions that independently functioning individuals perform on a daily basis: bathing, dressing, using the toilet, transferring (to or from bed or chair), eating, and caring for incontinence.

Other common LTC services include assistance with everyday tasks, sometimes called Instrumental Activities of Daily Living (IADLs), which includes items like housework, managing one's finances, taking medications, shopping for groceries, caring for pets, and other similar activities.

Many public programs determine eligibility for services according to a person's need for help with these items, while many long-term care insurance policies use the inability to perform independently a certain number of ADLs as criteria for paying benefits.

Having had two parents (at separate times) reside in assisted-living homes, it became clear to me that unless you have so little money that you will qualify for Medicaid, or so much money that you can pay the bills out of your own pocket, you should consider buying long-term care insurance. Neither one had such a policy; it was unfortunate to see so much of their lifetime savings be drained.

However, long-term-care insurance is expensive. In a recent Wall Street Journal article, "Why People Don't Buy Long-Term-Care Insurance," researchers suggested that a deeper problem may be that consumers are looking at long-term-care policies the wrong way. In addition, just as important, insurers may be missing opportunities to adjust their products in ways that might address and overcome some of the root causes of those misunderstandings.

For instance, one study found that many people regard long-term-care insurance as having no real value if ultimately the payouts aren't needed. That is, instead of looking at long-term care insurance primarily as financial protection, many people think of it as an investment (and a bad one at that). They don't think about the catastrophic losses a policy could help them avoid.

From a behavioral economics viewpoint, which I have discussed previously in several blogs, including a few entries on the impact of behavioral economics on total rewards programs, the research suggested that some consumers' rejection of long-term care insurance is based on what psychologists call "narrow framing," or people's tendency to exclude key factors when making decisions, particularly when involving complex decisions. In the study, narrow framers were only half as likely to buy such insurance, regardless of other demographics considered.

While the authors' findings suggest that there are consumer attitudes that need to be overcome, they also believe that insurers could better position their products in the marketplace by providing more and better education and information to consumers regarding the high probability and high costs of needing LTC. They especially see an opportunity for insurers to focus much of their efforts on educating adult children (the so called "sandwich generation") who may have caregiving responsibilities and decision-making regarding their aging parents.

Some employers offer the access to such coverage via voluntary benefits programs, but the number of employers is low, and even lower, is the percentage of participants. Employers are in a good position to offer such coverage, but doing so requires more players, more choices and certainly more education. Many insurance carriers have gotten out of the business and there needs to be more plan design choices. Did you know that employees can use HSAs to set aside tax-deductible funds that can be used to pay for LTC premiums? Distributions from HSAs can cover qualified LTC premiums.

Long-term care expenditures are among the main reasons an individual's retirement plan might fail to meet his or her full retirement needs. New strategies need to be examined for improving long-term care security in retirement. One potential strategy is for more employers to offer this benefit. However, to do so there needs to be more players in the marketplace, which means better underwriting tools to learn to price the product appropriately, while offering more consumer options.

Offering more tax incentives and best practices that can be leveraged in order to increase employer-sponsored long-term care insurance participation? For those people with individual financial planners, are they advising you about the reality of the need and perhaps the importance of the benefit?

Retirement preparedness ... are we REALLY prepared?!?