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Schmalberg Associates
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How Long-Term Care Planning Can Save You Money and Protect Your Assets (A thorough review and detailed analysis)
As people get older, they are more likely to develop chronic conditions or physical and cognitive disabilities, which will require on-going assistance with day-to-day living. Long-term care (LTC) is the assistance required by an individual with a chronic illness who cannot perform one or more activities of daily living (ADLs)[1] or the help given to a person who needs substantial supervision due to a cognitive impairment such as Alzheimer’s. Long-term care can include custodial care (assistance with the activities of daily living), medical care and other personal services such as room and board. Long-term care assistance can be provided in people’s homes, community centers, assisted living facilities and nursing homes.
Almost half of all Americans will need long-term care services at some point in their lives.[2] Of those who are in the age 75 plus bracket and living at home, 44.7 percent report limitation of activity caused by chronic conditions.[3] The statistics clearly illustrate the need for long-term care. While we all hope that we will never need long-term care, many of us will find ourselves in that position at some point in our lives. Since long-term care costs are already very high and will continue to increase over time, it is important to make sure that we will be able to pay for care at an acceptable level of comfort in the setting we choose should we require it.
Shortages in long-term care services and soaring costs await us due to the upcoming explosive growth in the elderly population as 77,702,865 baby boomers—the largest generation of Americans ever born, approach their retirement years.[4] Increased longevity due to medical advances and healthier living habits have already resulted in a sharp increase in the over-65 population. Over the decade 1990 to 1999, the number of people 75 – 84 years of age increased 23 percent and those over age 85 increased 38 percent.[5] There are now more than 35 million people in the U.S. over age 65 and that figure is expected to pass 70 million by 2030.[6] It is anticipated that record numbers will require long-term care. Unless current long-term care resources and services are rapidly expanded in preparation for this unprecedented demand, shortages will occur and the costs of long-term care will escalate beyond the already high price-tag.
The Center for Medicare and Medicaid Services reports that long-term care is already very costly. In Fiscal Year 2000, $140.7 billion was spent on long-term care services for persons of all ages.
As will be shown below, the risk of personal and family financial ruin from long-term care expenses is quite real. The frightening prospect that many face today is that home or facility care are both very expensive and can easily drain financial resources. Accountants and financial planners, as well as other advisors who act in a fiduciary capacity, have the responsibility to warn their clients about the financial risks associated with long-term care and guide them to a long-term care professional. No retirement plan or estate plan can be complete without addressing the issue of long-term care funding. Without adequate planning, individuals' assets could be depleted in a matter of a few years. Retirement funds, paid-off homes and intended inheritances would be lost. Contributions to foundations and charitable organizations would cease.
Many Americans do not plan ahead financially for their long-term care needs. Others wrongly assume that Medicare, Medicare supplemental policies or standard health insurance policies will cover the costs of long-term care services provided in settings such as nursing facilities or assisted living residences. Consequently, many Americans are needlessly impoverished each year by the costs of long-term care.
To assess the funding that will be required to pay for long-term care over a prolonged period, let's examine the present cost of long-term care
We use New York City (which has a high national nursing home rate and a low Home Health Aide rate) as an example to illustrate the soaring costs of long-term care.
The New York City, nursing home, semiprivate room, average cost per day is $301 while the national average is $169 per day.[7]
One's own home is often chosen as the most preferred long-term care setting over institutional care. This is because the individual needing care can remain with family and friends, can be in familiar surroundings and because the home usually offers superior physical and psychological comfort. The average rate for a Home Health Aide in New York City is $15 per hour while the national average is $18 per hour.[8]
An additional advantage of using one's home as a long-term care setting is that in many instances the individual may only require a Home Health Aide for a few hours in the morning and evening and thus avoid institutional care. However, should an individual require near round the clock coverage in the home, the average cost per day for a Home Health Aide in New York City would be $15 per hour multiplied by 20 hours, or $300 per day. The national average for 20 hours would be $360 per day.
As can be seen, both nursing home and Home Health Aide care rates can vary significantly by geographic location. For rates in your area see the Market Survey on Nursing Home and Home Care Costs, 2004.
To compute the present annual cost of long-term care and compute yearly increases due to inflation, we use the NYC $300 per day rate as our guide. Multiplying the $300 per day figure by 365 days, we arrive at an average annual cost of $109,500 for New York City.
The figures in the table below were arrived at using a Long-Term Care inflation rate of 5.0 percent compounded yearly.[9]
Sum: $1,377,278
The need for long-term care can arise quite unexpectedly, often creating a large financial outlay. Unless properly prepared for in advance, such a financial burden could necessitate the distress sale of one’s home, assets and exhaust the funds in retirement plans. Even the very affluent would take a hard financial hit to their assets. Financial planning can help us determine the role that long-term care insurance can play in covering the costs of care and in protecting our homes, assets, financial investments and retirement plans. As can be seen, those without long-term care insurance face an unprotected risk in excess of $1,300,000 over the next ten years.
In fact, many consider long-term care insurance the financial tool that allows people to avoid nursing home care by offering them the funding that enables them to stay in the comfort of their homes.
The earlier one plans for long-term care and purchases a policy the lower the premiums will be. The cost of waiting significantly increases with age and is therefore an important consideration to take into account during the financial planning process. Be advised that waiting cannot only cause higher premiums, but may also jeopardize the ability to purchase even a standard long-term care insurance policy should a medical condition arise. (See Insurability Questions.)
Note: The C-Corporation can provide tax-qualified long-term care insurance coverage as an employee benefit. The C-Corporation may then be able to deduct the full premium on these policies as a reasonable business expense for bona fide employees (with or without ownership in the business), their spouses and their dependents. The C-Corporation is not required to offer LTC insurance policies to all employees, but may elect to cover only key executives or personnel, their spouses and their dependents. This allows the employees, including those which are officers and/or stockholders, to exclude the premiums from their taxable income and receive long-term care claim benefits tax-free. Also beginning in 2003, new tax advantages became available for the self-employed, S-Corporations and partnerships. Consult your financial advisor.
In another example let's examine the projected cost of long-term care, should a couple require such services starting in 15 years. Inflation is anticipated to drive up the cost of care from $300 per day to $594—which would amount to $216,810 for each spouse for that year. The following table is a projection of the financial exposure that the couple could expect over this ten year period.
Financial Risk Per Spouse: $2,727,013
Total Risk: $5,454,026
Due to the high price-tag of long-term care, the prudent decision is to insure against such a potential loss. Even those who are financially affluent do not self-insure, just as people do not generally elect to self-insure their homes, properties, businesses, autos and health/medical expenses.
The Role of Schmalberg Associates The professional and courteous staff at Schmalberg Associates develop strategies and tailor plans to meet your anticipated needs and fit your financial resources. We have the expertise, experience and resources required to assist individuals and corporations with such vital decisions. Our business relationships with the leading insurance carriers afford our clients favorable underwriting, a myriad of plans to meet diversified strategies and budgets, and the ability to place policies for those who are difficult to insure. We achieve results through hard work, performance and the personal touch.
We appreciate your business and will work hard for your!
Go to the LTC Policy Issuance Process.
For a free quote or any assistance call us at (718) 467-3860. [1] Activities of daily living (ADLs) include bathing, eating, dressing, toileting, continence, transferring and ambulating (walking).
[2] United States General Accounting Office, Medicaid Nursing Home Payments, GAO-04-143, 2003.
[3] Health, United States: 2003 Table 56, US Department of Health and Human Services, Washington, DC, 2003.
[4] United States General Accounting Office, Aging Issues, GAO-04-275R, 2003. The Mature Market Institute, A Demographic Profile of American Baby Boomers, Westport, CT, 2003.
[5] Hetzel, L., and Smith, A., The 65 Years and Over Population: 2000, Census 2000 Brief, C2KBR/01-01, U.S. Census Bureau, October 2001.
[6] United States General Accounting Office, Aging Issues, GAO-04-275R, 2003.
[7] The Mature Market Institute, Market Survey on Nursing Home and Home Care Costs, Westport, CT, 2004.
[8] Ibid.
[9] The average LTC yearly inflation rate is currently 5.0 percent (National Association of Insurance Commissioners, A Shopper's Guide to Long-Term Care Insurance, Kansas City, MO, 2003) and LTC inflation exceeds this figure in many geographic areas of our country. For comparison purposes, the Consumer Price Index (CPI) national city average is 3.0 percent (U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Indexes, 2004). |
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