The Real Cost of Long-Term Care

Most families have to address the issue of long-term care (LTC), whether you're in or near retirement or whether you or your spouse are expected to care for, contribute to, or oversee your parents' care. If you are making decisions about savings or insurance for your or a family member's long -term care, it's best if you know all the costs.

What is LTC?

Long-term care is a continuum of medical and social support services designed to support the needs of people living with chronic health problems that affect their ability to perform everyday activities.

For the purposes of this article, we won't be focusing on the direct medical costs, but rather the direct costs of support services, in-home and institutional, and more importantly, the indirect costs to family and other caregivers.

How prevalent is the need for LTC?

The need for LTC is usually arises from an inability of an individual to perform one or more activities of daily life or ADLs. These could include bathing, feeding oneself, dressing, etc. The individual may also need help with less fundamental, but more complex tasks such as cooking, cleaning, shopping, or managing their medications or finances. These are known as IADLs or instrumental activities of daily life. This need can arise through illness, accident, or merely frailty

The Congressional Budget Office estimated that 45% of 65-year olds will eventually need some form of nursing home care and LTC care needs arise at much lower levels than a full-on nursing home stay. 65-year old women have a life expectancy of roughly 19.5 years. Of that, they are expected to spend nearly six of those years with some form of disability. Men are expected to spend three years out of their 15 year, 4 months on average with some sort of disability.

Who provides the care?

Overwhelmingly, LTC is provided by family and friends.

A 2008 study found that a quarter of adult children provide some form of personal or financial care for their aging parents. A more recent MetLife study estimated the aggregate lifetime cost in the U.S. for this help is almost $3 trillion. This includes:

• Direct payment for care
• Lost wages from reduced hours
• Lost career opportunities for the caregiver
• Lost pension and Social Security benefits due to reduced lifetime earnings

This, of course, ignores the intangible costs including loss of free time, strain on other relationships, and caregiver stress.

Estimates are that the average family caregiver spends over $5,500 per year in out-of-pocket expenses and loses over $300,000 lifetime in wages & benefits as noted above.

The costs fall on employers as well with billions being lost due to caregiver absenteeism and presenteeism, unpaid leave, and other work interruptions.

Paid LTC

Nearly, two-thirds of paid LTC comes from Medicaid. Unfortunately, Medicaid pays only after an individual has spent down their assets to a bare minimum. That amount varies by state, but Missouri's limit of $1,000 is typical.

Roughly 15% of paid care comes out-of-pocket, either in its entirety or, just as likely, as part of the Medicaid spend-down. These funds are often in tax-deferred savings on which taxes must be paid as they are spent. If there is a remaining spouse, they often have insufficient funds left to finance their retirement or LTC needs.

Few are covered under LTC insurance. Less than 10% of all paid LTC costs come from LTC insurance. In recent years, many have lapsed their LTC policies in the face of large premium increases. Older policies suffered from inadequate premiums that led to unexpected increases or, in extreme cases, insurers exiting the market. In addition, LTC policies can be quite expensive - not surprising as roughly half of policy-holders file a claim at some point in their lives. I've written elsewhere about what to look for in an LTC policy, but key to coverage is applying for it while your health is still good enough to qualify.

Even rarer still is the use of continuing-care retirement communities (CCRC), CCRCs are integrated care communities that one can live in as they transition from independent senior living to assisted living to nursing care. LTC is essentially pre-funded. CCRCs are generally limited to the more wealthy and the healthy (there is an application/qualification process).

Direct Costs

According to the 2012 Genworth Cost of Care Survey, the average cost of a private nursing home room is $240/day, though there is a wide variance by location. Assisted living rates averaged $3,500/mo. Home care services came in at $19/hr for homemaker services and higher for home health aides. The average nursing home stay is 2.4 years.

Needless to say, any need for LTC will cut into all but the largest of nest eggs.

Putting it all together

In preparing your financial plan, a lot of questions need to be addressed:

• How am I going to plan for my LTC?
• What are the current and expected (all-in) costs of:
  • Long-term Care
  • LTC Insurance
• Do I have enough assets that I can self-insure?
  • Even in the most extreme case?
• Am I going to be responsible for my parents' (or anyone else's) LTC? And if so:
  • Will it be in the form of financial contribution or direct care giving?
  • Am I temperamentally suited to be a care giver?
  • Have I factored in the hidden costs addressed above?
  • Will it make more sense for me to buy them LTC insurance or fund a CCRC?
  • Will I have any help from other family members?
  • What are their limitations (fiscal, time, temperament)?
  • How will this impact the extended family (spouses, children, etc.)?
  • How does this impact pre-death giving or post-death bequests (e.g. "I took care of Mom, so she left me the house")?

Like so many things that involve money, it's not just about money. Planning for roles, responsibilities, and relationships are just as important as planning the finances.

Note: Many of the ideas and all of the statistics in this article come from a Society of Actuaries monograph that can be found at www.soa.org.