After you make it through retirement and into Medicare, your greatest financial health-related risk is long-term care. Long-term care includes a variety of services to meet health and personal needs in your old age, or at any age, should you suffer an illness and need time to recuperate. Most long-term care is simply assistance with the activities of daily living: dressing, bathing, using the bathroom, and the like. Long-term care can be provided in any of the following places:
Your home. This may include skilled nurses, health aides, personal care aides, and home repair people (to install grab bars, nonskid tub aids, ramps, handrails, etc.).
Community centers. These can be senior centers and adult centers that provide day care, transportation, meals on wheels, and so forth.
Retirement communities. Residents often enter as fully functioning adults and then move on to increasing levels of assistance, including an on-site nursing home.
Assisted living communities. Here residents typically live in their own apartments but receive help with daily living activities like eating, bathing, bathroom, and transportation. Typical costs range from $2,000 to $5,000 per month per person.
Nursing homes. These are for people who cannot be cared for at home or in a community environment. Medicare does not cover this type of care except for a limited number of days following an illness.
Approximately 10 million Americans need and receive long-term care today—about 65 percent of them are elderly, and about 35 percent are people with lifetime needs (e.g., those who have birth defects or who have suffered traumatic injuries).
Approximately $200 billion a year is spent on long-term care, with about 40 percent paid by Medicaid. The remaining 60 percent is provided mostly by individuals themselves ($50 billion), by Medicare ($36 billion), mostly for short periods of time, and by private long-term-care insurance ($20 billion).
Medicaid is not an acceptable or viable option for the long-term care requirements of most people reading this book. Most people reading this book should either get long-term-care insurance or plan on spending most of their assets on long-term care if and when they need it.
Without a financial plan for long-term care, you could end up on Medicaid and in a nursing home not of your choosing when you run out of money.
How Much Long-Term Care Do You Need?
If you expect to live a long time, you should expect to have virtually an endless need for long-term care.
Here is what long-term care can cost:
- The average nursing home today costs $82,500 a year and is projected to exceed $200,000 a year by 2020.
- Having someone come into your home just to help with bathing, dressing, meals, and household chores costs $20,800 a year at only $400 per week.
- If you ever require round-the-clock care, a home health aide could cost $18 an hour or more for 168 hours per week—that's $157,248 in labor alone. Double that to more than $300,000 a year for care by a nurse.
How You Can Finance Your Long-Term Care
There are four basic ways to finance your long-term care:
Family support and caregiving. This is the way long-term care has been provided for generations. While all of us like the idea of taking care of our parents as they age or being taken care of by our children, this is simply not a viable option for most Americans today who have jobs and/or children of their own.
Personal savings. This is not a viable option for most people because they do not have millions of dollars available, nor do they know how much long-term care they will need. It is also selfish if your estate will be needed to support your spouse or children after you are gone.
Home equity options. This is an increasingly popular method, particularly with the advent of reverse mortgages, but it has the same limitations as personal savings. In addition, most people would prefer to live out their later years in a place other than a full-size home (e.g., in a retirement community).
Private long-term-care insurance. This is my favorite choice for financing long-term care. Insurance is the ideal method to finance unknown risks that can be predicted in the aggregate using actuarial information.
Choose “HIPAA-Qualified” Long-Term Care Insurance
With one important exception, the important things to know about choosing a long-term-care insurance policy are similar to those in choosing a long-term-disability policy (see “Long-Term Disability” in Chapter 5). The important exception is the tax treatment of a long-term care policy. Under HIPAA law, a “qualified” long-term care insurance policy is treated as a health insurance policy for purposes of taxation: Employers may deduct premiums from taxable income and exclude benefits from taxable income
I strongly recommend that you purchase long-term care insurance, but don't let an insurance agent talk you into purchasing more than you need—you never need more insurance than you can comfortably afford. You may use your HSA for the payment of long-term care insurance premiums.