Despite the fact that more than 70% of all retirees need some long-term care services in retirement, very few have a plan in place. This failure to plan not only impacts one’s own finances, but also puts family caregivers in a potentially harmful position. Most long-term care services are provided informally and in an unpaid setting. Without proper planning, the burden of long-term care is often shifted onto family members.
Setting up a long-term care plan isn’t just about budgeting for expenses or funding the risk through a product like long-term care insurance. In order to properly plan for long-term care, savers need to decide how they want to get care, the type of care they want to receive, who will provide that care, grant permission for family members to provide care, and develop a way to finance the costs. According to Bill Borton, managing principal of W.R. Borton & Associates, “in the absence of a plan…family members must put their busy lives on hold and become caregivers.”
Far too many people think that all there is to a long-term care plan is traditional long-term care insurance. Borton suggests that everyone needs a long-term care plan. But he also stresses that “just having insurance does not mean there is a plan.” As a result, many people who decide that traditional insurance products are a poor fit disregard further planning and miss out on many other planning options and benefits.
Impacts on Caregivers
The impact on caregivers reaches beyond finances, according to a recent study by Lincoln Financial Group. In their consumer study, 84% of caregivers cited the emotional burden as the most difficult aspect of providing long-term care.
A lack of planning thrusts an often-unprepared family member into the role of caregiver, and while the study shows 97% of Americans believe families should discuss long-term care plans before care is actually needed, only 52% have had conversations with their spouse and 29% have done so with their children.
The financial impact on caregivers might only worsen according to Debra Newman, president of Newman Long Term Care, an insurance provider. According to Newman, in 2010, the ratio of caregivers to patients needing long-term care was 7 caregivers to 80 patients. In 2018, that ratio is projected to nearly halve: 4 to 1. The long-term impacts on caregivers are more difficult to quantify, but real. Newman notes that they often have to leave the workplace to provide care for an elderly family member, which reduces their own retirement savings and security.
Quantifying the Costs of Long-Term Care
The cost of long-term care vary by geographic area. Annual studies, like Genworth’s cost of care study and the aforementioned report by Lincoln Financial Group, can help provide a baseline idea of what care might cost in an institutional or professional setting.
In most instances, however, responsibility for providing care still falls to spouses and children. As you develop a long-term care plan, make sure you consider the negative financial impacts this might have on them. Consider: Will your family caregiver have to leave the workforce? Will they have to pay for certain expenses out-of-pocket? Your plan may include setting aside funds to offset lost wages or out-of-pocket costs for your family caregiver to help relieve their financial burden.
Funding Long-Term Care
There are a variety of ways to fund the cost of long-term care. The most obvious choice is to self-fund. This means you set aside the projected costs in investments and savings, likely as part of your retirement planning.
Second, you can opt to use traditional long-term care insurance, which can be extremely beneficial when used for covering the high costs of a full-time nursing home because long-term care insurance can be tailored to specifically cover these types of costs, while other funding sources might fall short. However, be aware that ongoing premium payments that can rise over time, making it hard for some individuals to afford the coverage throughout retirement.
Finally, newer products called asset-based or hybrid policies combine features of traditional long-term care insurance and life insurance into one policy. Hybrid policies can be more affordable and are guaranteed to provide either a life insurance benefit if you don’t need long-term care or provide coverage if you need long-term care services.
One additional option is to rely on the benefits provided by Medicaid. However, in order to qualify for Medicaid, the individual needs substantially spend down his or her own assets. Medicaid also typically leaves the individual with less control over the type of care he or she receives because Medicaid only covers limited services and not all facilities accept Medicaid. For example, Medicaid is not required to cover costs in an assisted living facility, and legally cannot cover the Medicaid recipient’s room and board in an assisted living facility, but could cover some care costs.
Taking the time to set up a plan for long-term care gives your family members and caregivers the permission to make decisions and spend money to get you the care you need. Without setting up a plan ahead of time, the burden is shifted to the family caregiver to make decisions about how to fund care and how to provide care. While transferring some portion of the financial risk to an insurance company provides peace of mind, instant liquidity, financial leverage, tax advantages and may include care coordination services, a properly set up plan is not all about the specific product or funding mechanism you utilize, but instead about your qualify of life and the family caregivers you are protecting.
Jamie Hopkins is Director of the American College’s New York Life Center for Retirement Income and an Associate Professor of Taxation at the American College where he helped develop the Retirement Income Certified Professional® (RICP®) designation. The American College of Financial Services is a non-profit, accredited, degree-granting institution focused on educating financial advisers.