Long-term care: What’s at risk?
Clients who lack a plan for long-term care costs create complications for themselves, their retirement plans and their friends and family.
By Steve Schoonveld from the November 1, 2012 issue of Life Insurance Selling • As the head of Linked Benefit Product Solutions for the Lincoln Financial Group, Steve Schoonveld manages the long-term care financing solutions offered by the insurer.
Whether your clients are of average health or in perfect health, they are likely to require some form of long-term care in their retirement years. As little as a few months of care can impact the most well thought-out retirement plans. Long-term care needs can also have consequences for the extended family of the care recipient for many generations to come, making the planning for both the financing and receiving of care critical.
An often-quoted statistic, initially published in 2005, estimated 69 percent (often rounded up to 70 percent) of people turning age 65 will have a long-term care need, ranging from a relatively minor impairment to a severe and lengthy condition.1 A multitude of health and physical conditions can emerge at any age and require the use of long-term care services. Such services, which may be needed for anywhere from a few days to a few decades, can be received in a variety of locations, performed by several different types of providers and billed at daily costs that vary significantly.
What are the costs?
When a client has an impairment that requires paid professional care, the costs often depend on the setting where the care is received as well as the geographic location. According to a 2012 study performed by Univita Health on the costs of long-term care services, the average daily cost of a stay in a nursing home can vary from $133 to $581, or approximately $49,000 to $212,000 a year. Similarly, the hourly rate for home health care services can range from $15 to $49 per hour. Assuming a two- to eight-hour per day range of care, the approximate annual costs could range from $11,000 to $140,000. In short, the annual cost of a long-term care event requiring formal (paid) services can be as little as $11,000 per year for a nominal amount of care to more than $212,000.2
According to a recent study, currently non-disabled 65 year olds will need an average of two years and two months of informal (unpaid) and/or formal long-term care services during their remaining years.3 This average is inclusive of those who will not require care and varies greatly by gender, as wives both tend to provide informal care for their husbands and live longer. Furthermore, for one and a half years of this time, the claim will be severe enough to warrant paid professional care.
Since planning to an average allows for potential failure half of the time, let’s assume the duration of the formal care need is 50 percent above the average, at 2.25 years. This is roughly the full average duration of impairment should informal care not be available. Let’s also suppose a modest cost trend of 3 percent over an assumed 15-year period until the typical claim may occur. Under this scenario based on averages, a 65 year old can expect long-term care expenses to top $750,000 and exceed $1.3 million if we assume either a longer stay or a greater rate of inflation on costs.
Impact on retirement plans
With these levels of potential expense, uninsured or unplanned LTC episodes can derail the best-laid retirement plans, which, in many cases, are already under stress. According to a recent study by the Center for Retirement Research at Boston College, at 62, Social Security’s earliest retirement age, only about 30 percent of households are prepared for retirement. Even at age 66, Social Security’s current full retirement age, only 55 percent of households are projected to be prepared for retirement4.
As these realities loom, people are living longer, Social Security continues to be scrutinized and traditional pension plans are disappearing. This could mean clients need to stretch their retirement assets over a longer period of time while still keeping up with inflation and trying to maintain financial independence. With all of these factors already in play, any impairment requiring long-term care services can have an even deeper effect on retirement security.
Whether your clients are preparing for their retirement years or are in retirement, there is a limited ability to adjust one’s plan when the expense of long-term care services arises. Such adjustments can be made when dealing with some of the common retirement risks already mentioned. For example, retirees will often adjust and curb their spending habits when living expenses increase. And when the potential to outlive retirement income and assets is apparent, the use of home equity by downsizing can be beneficial.
Another retirement adjustment that clients might make is delaying retirement when accumulated assets have lost value during market declines. However, unlike market declines, where one can presumably wait for asset values to recover, once assets and income are spent on long-term care needs, they are not recoverable. When severe impairments are not insured and informal care is not an option, there will likely be a need to divest assets that were allocated toward meeting retirement income objectives.
While the above figures clearly demonstrate the need for advisors to assist their clients with planning for the financial impact of formal long-term care, informal care is also a critical part of the conversation, as it is the most common form of care. It’s estimated that approximately 87 percent of Americans who need long-term care receive it from informal, or unpaid, caregivers.5 However, while informal care is unpaid, that does not mean it comes without a price, as it can have tremendous impact on the family member or friend serving as the caregiver.
In 2009, approximately 42 million family caregivers in the United States provided care to an adult with limitations in daily activities at any given point in time.6 Unfortunately, these selfless acts can burden caregivers in many ways.
A 2010 survey showed 20 percent of those who have overseen the long-term care of a loved one personally helped pay for it, with 93 percent using their own income and 48 percent tapping into personal savings.7
Oftentimes, caregivers are also required to scale back their working hours or leave the workforce all together. This not only affects the caregivers’ day-to-day financial planning, but also their retirement planning. Estimates indicate that lifetime income-related losses sustained by family caregivers age 50 and over who leave the workforce to care for a parent are about $115,900 in wages, $137,980 in Social Security benefits and, conservatively, $50,000 in pension benefits.6 While astounding enough, these statistics do not take into account the professional goals that caregivers may be putting on hold.
Not to be overlooked are the emotional and health considerations that accompany long-term care responsibilities. When considering that caregivers are often an elderly spouse or a daughter/son who is “sandwiched” between taking care of an elderly parent as well as his or her own children, there is little time for the caregiver to focus on his or her own wellbeing.
The implications of uninsured long-term care events can also reach the heirs of care recipients. In instances where the care recipient (and/or his or her spouse) is required to tap into personal savings, sell a home, go into debt, or take other undesirable measures to fund long-term care expenses, the wealth and legacy available to pass onto loved ones is greatly diminished.
Plan and act on behalf of your client
With more than 19 percent of the U.S. population projected to be age 65 and older by 2030,8 it’s reasonable to assume the need for long-term care planning is not going away anytime soon. While many people may be aware of the financial risk or even seen first-hand how long-term care incidents have impacted others, the majority of people today still do not have their own plans in place.
As an industry, there is tremendous opportunity to help consumers tackle this persistent threat. For your clients that have not begun planning, now is the time to begin the conversation. For those that have plans, it’s important to make sure they’ve considered all of the aspects — from where they’d like to receive care if they need it, to how they would fund the care, to potential implications on the family.
As these conversations occur, it’s also important to dispel any misperceptions about public financing options for long-term care. Today, Medicare does not pay for long-term services, such as help with bathing or custodial care, which are often the largest parts of long-term care.9 Conversely, while Medicaid does cover nursing home, home-based and community-based care, it is subject to income levels and state qualifications, which may vary. A false understanding of these types of funding options can result in clients being unprepared, leaving retirement plans and assets at risk and families adversely affected.
The impact of an uninsured long-term care event, whether in a facility or in one’s home, can have ramifications felt for generations. So whether clients are about to retire, in the accumulation phase of retirement, or sandwiched between taking care of parents and their own children, now’s the time to address their long-term care risks with proper planning and protection.
1. Peter Kemper, Harriet L. Komisar, and Lisa Alecxih; “Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect?” Inquiry 42 (2) (Winter 2005/2006): 335-350
2. Univita Health; “Cost of Care Survey”; 2012
3. Eric Stallard; “Estimate of the Incidence, Prevalence, Duration, Intensity, and Cost of Chronic Disability Among the U.S. Elderley”; January 2011
4. A. Munnell, A. Webb, L. Delorme, and F. Golub-Sass; Center for Retirement Research at Boston College; “National Retirement Risk Index: How Much Longer Do We Need to Work?”; June 2012, Number 12-12;
5. The Scan Foundation; “Who Provides Long-Term Care in the U.S.?”; Fact Sheet; October 2012
6. L. Feinberg, S. Reinhard, A. Houser, and R. Choula; AARP Public Policy Institute; “Valuing the Invaluable: 2011 Update, The Growing Contributions and Costs of Family Caregiving”; June 2011
7. Lincoln Financial Life Stages Survey: Long-Term Care, September/October 2010
8. Population Division, U.S. Census Bureau; Table 2. Projections of the Population by Selected Age Groups and Sex for the United States: 2010 to 2050 (NP2008-T2); August 14, 2008
9. DHHS; National Clearing House for Long Term Care Information; http://www.longtermcare.gov