Middle-class retirees have the greatest risk of seeing a lifetime of careful savings vanish in a matter of months if they were to experience a sudden health crisis forcing them into a nursing home.
Even a six-figure nest egg, built through decades of hard work, would dwindle rapidly when paying more than $10,000 a month for nursing home bills. And, sadly, people who need long-term care must deplete just about all their savings in order to qualify for government help through Medicaid.
“Whether my wife and I are financially secure in our retirement years depends upon the health care event I ultimately have, which is almost entirely out of my control,” said Tim Sechler, an elder law attorney based in Cranberry Township.
The government program that pays for long term care — Medicaid — has strict asset and income limits, requiring benefit recipients to exhaust their personal savings, liquidate retirement accounts and sell assets to a point where they are entirely dependent on Medicaid for their ongoing care, and often the spouse is left living on Social Security.
Regular health insurance will not come to the rescue for people who need long-term health care.
This is where a special type of insurance called Long Term Care, or LTC insurance plans come in.
Long-term care insurance provides coverage for the care patients receive in an assisted living facility, nursing home or even their own home. While it’s a mathematical likelihood that most people will need some form of long-term care, the majority of people don’t have long-term care insurance — mainly because it isn’t cheap, the premiums keep rising and fewer insurance companies offer it.
“The people who have the biggest struggle, or the biggest decision to make are the people who fall in the middle. They’ve accumulated some assets, but they’re not independently wealthy,” said Ashby Daniels, a financial adviser with Shorebridge Wealth Management on Washington’s Point.
‘All their assets are at risk’
Wealthy people simply buy long-term care policies to protect their assets as part of their financial and estate planning, Mr. Daniels said.
People all the way at the bottom can’t afford long-term care policies, but they might already qualify for Medicaid.
That leaves people in the middle class with the most to gain and lose.
“If people in the middle run into a long term care situation, now essentially all their assets are at risk,” Mr. Daniels said. “They have the biggest decision to make because they have to weigh the cost benefit of whether to transfer the risk (by buying a long term care policy) or take the risk themselves.”
As an elder law attorney, Mr. Sechler said he sees daily the detrimental effects of what happens to families who are scrambling because they found out they’re losing their house to a nursing home.
One of the most common type of cases he handles are what he calls “nursing home crisis cases,” when someone in a family has been admitted to a nursing home and relatives need that person to try to protect assets.
“We call those ‘crisis cases’ because to most families, $15,000 a month in unexpected bills is a crisis,” Mr. Sechler said.
Once someone with assets is admitted to a nursing home for long term care, they must pay the monthly bill out of pocket to a point where they only have $8,000 cash, their house and a car, he said. “That process is called ‘Medicaid spend down,’ when you pay the nursing home bill down to the point where you’re eligible for Medicaid.”
If one spouse needs care and the other one doesn’t, Medicaid rules provide for a reasonable level of assets and income for the healthy spouse, which varies.
According to 2020 data from the U.S. Department of health and Human Services, nearly 70% of 65-year-olds will eventually need long-term care services or support. Women typically need care for an average of 3.7 years, while men require it for 2.2 years.
The rising cost of aging
America is getting older faster, with 10,000 Baby Boomers turning 65 every day until 2030.
At the same time, the rising cost of aging in America is becoming a big problem. The Pennsylvania 2021 median cost of a private room in a nursing home was $367 a day or $11,157 a month, according to the A Place for Mom website.
Insurance industry data from LIMRA shows only 3.1% of Americans have purchased long-term care insurance and most of those are older consumers. According to a study by LIMRA and Nationwide in May, the most common reason for not purchasing long-term care insurance is cost. Boomers and women were significantly more likely to indicate expense was the reason for not owning it.
Many factors affect the cost of long-term care insurance, but the most important are age and health.
Premiums range widely. According to aplaceformom.com, a single male aged 55 could pay as little as $950 per year, whereas a couple, each aged 55, on a plan with benefits that grow at a rate of 5% annually, could pay $8,575 or more.
The average annual premiums in 2022 for 55-year-olds buying a $165,000 policy was $950 for a single male; $1,500 for a single female; and $2,080 for a married couple.
There are fewer than a dozen providers of long-term care insurance today. The biggest include Northwest Mutual, New York Life, Bankers Life Mutual of Omaha and National Guardian Life. Providers in decades past had priced their policies too low. Insurers that still provide the coverage constantly ask state insurance commissioners for rate increases on an annual basis to cover rising costs.
“Traditional long-term care insurance policies will pay out a long-term care benefit if the policy holder cannot perform two out of six activities of daily living. If the insured does not use the long-term care benefits, they will receive nothing,” said Brianne King, manager of financial planning at Sewickley-based Fragasso Financial Advisors.
What’s gained popularity more recently is purchasing a long-term care policy that also has a death benefit associated with it,” she said. “So, if the insured does not use the long-term care benefits, they will receive a death benefit when they pass away.”
Families need to plan ahead
Robert Fragasso, CEO of Fragasso Financial Advisors, Sewickley, said long-term care is factored into financial planning.
“When we do financial planning for our clients, we project one of them to be in a nursing home for three years to see if the finances can hold up. And if the non-incarcerated person will still be OK,” he said.
Although one could self-fund long-term health care, Mr. Fragasso said it makes sense to own long-term care insurance for estate planning purposes.
“Who wants to spend $5,000 a year on insurance? Maybe in a couple of years it will be $6,000,” he said. “But it’s not a six-figure or seven-figure chunk out of my estate. If you’re a middle class person and you’ve put together in your retirement plan a couple hundred thousand dollars, you are going to blow through that in two or three years in a custodial care facility.”
In times past, attorneys would counsel their clients to give their assets away to children so that if they went into a nursing home the state would start paying the bill right away, Mr. Fragasso said.
That plan has drawbacks.
The government does a look-back period of five years on assets that were given away prior to applying for Medicaid, and it could result in a penalty on the benefits.
Also, Medicaid patients don’t get the same living arrangements as patients who are full pay.
“You might be in a ward with four other people,” Mr. Fragasso said. “And not all facilities accept Medicaid.”
Mr. Sechler said he’s able to preserve assets for families faced with a nursing home crisis.
But families need to plan ahead.
“I can put the home and put money in a trust and then if the person needs to apply for Medicaid more than five years later, Medicaid cannot look at those assets,” Mr. Sechler said. “So when you apply for Medicaid they’ll ask if you’ve given anything away in the last five years. In an ideal situation you would have transferred the assets to a trust more than five years before you need Medicaid.
“We call that pre-planning for Medicaid.”
