Plan for long-term care now to avoid financial pain later

As part of retirement planning for my clients, I always ask them the question, “Have you planned for long-term care?” Very often the answer is no. I proceed to ask, “Why not?” The answers I often get are: “Don’t Medicare and Medicaid cover that?” “I told my wife to just let me make (pronounced mah-kay, Hawaiian for ‘die’) if I ever get into that situation” or “My children will take care of me.”

People who do answer “Yes, we have thought about long-term care” are almost always those people who have experienced it firsthand through their family members. They understand the financial and emotional burden that long-term care can cause for families.

So, what is long-term care? Long-term care is when people require assistance, both medical and nonmedical, because they cannot care for themselves. According to the U.S. Department of Health and Human Services, 70 percent of those age 65 and over will require long-term care in their lifetime, and for married couples there is a 91 percent chance that one spouse will need long-term care at some point. Furthermore, the average amount of time that people stay in long-term care is three years.

Long-term care is the biggest threat to your retirement nest egg because of how expensive it is to get care, especially here in Hawaii. According to Genworth Cost of Care Survey 2015, Hawaii’s average annual cost of adult day care was $19,000 and a whopping $135,000 for a stay in a nursing home. Not many retirees have enough income to cover that kind of expense, yet many people overlook this in their retirement planning. Also, relying on your children can create a huge burden as they might already have their plates full with careers and raising their own children. We refer to them as the sandwich generation.

Now let me clear up some misconceptions that people often have when it comes to paying for long-term care:

1. “Medicare will pay for my care.”

Medicare will not cover most long-term care expenses because the majority of these services are considered “custodial care.” Custodial care is nonmedical assistance for daily living activities such as bathing, eating, dressing and using the toilet. And even if you require medical care, there are stringent requirements that you must meet to get Medicare coverage. For example, you must be hospitalized for a minimum of three days, then transferred to a long-term care hospital within 60 days of discharge. Even if you meet these requirements, Medicare will cover only up to 100 days of care. It covers 100 percent of the first 20 days, then after that, you are responsible for a copayment of $157.50 per day. After the 100 days you are responsible for the entire bill on your own.

2. “Medicaid will pay for my care.”

Unlike Medicare, Medicaid does cover long-term custodial care services. However, Medicaid is a joint federal and state program meant for low-income individuals. Medicaid applicants in Hawaii are disqualified if they have assets of $2,000 or more. You can’t transfer your assets to family members to try to qualify for Medicaid, as they will look back five years before the date you apply for Medicaid. When I found out that over half of all long-term care in the U.S. is paid by Medicaid, I was in disbelief. I thought to myself, “How can that many people have less than $2,000 in assets?” Then I realized they weren’t always broke; the long-term care bills made them broke. Those who don’t have long-term care insurance will begin by paying out of pocket. Then they will quickly run out of savings and eventually rely on Medicaid. That thought made me sad. These people who had worked hard to buy their home and build their life savings now have nothing. They are forced to spend the last years of their lives relying on government assistance. I wouldn’t want to end my life this way, nor do I want to see my parents in this type of dire situation.

How can we plan for long-term care so that we don’t have to become completely broke and rely on the government or our families to take care of us? There are several options.

Long-term care insurance: Long-term care insurance will have either daily or monthly coverage plans, with periods ranging from one year to lifetime coverage. Many of them also offer inflation protection so the benefits will continue to increase every year to keep up with the rising cost of care. One thing consumers need to be aware of with long-term care insurance is that insurance companies can raise the premiums on existing policyholders. Many policyholders were hit with huge increases (some up to 90 percent) in their premiums in the last five years. Insurance companies says it’s due to the lower-than-expected numbers of policies being canceled and a higher-than-expected number of people filing for claims. When insurance companies raise premiums, most of them will give the policyholder an option to either keep the same coverage and pay the higher premium, or lower the coverage in order to keep paying the same premium.

Life insurance with long-term care benefit: This type of insurance is becoming more popular. It is life insurance and long-term care insurance all in one. Some companies will even offer a spousal coverage, in which both spouses can be covered under one policy. The obvious benefit of life plus long-term care insurance is that if you and your spouse die without using the long-term care benefit, your beneficiary will receive the death benefit. However, according to the statistics, if you get a policy with your spouse, there is a 91 percent chance one of you will use it.

Self-insure, or saving money for potential long-term care needs: If this is the option you are choosing, you should save for at least three years of care. If you are married, multiple that by 2. Let’s do the math: $135,000 x 3 years x 2 people = $810,000. Let’s now add 2 percent inflation to that number. Say you’re 65 years old and you’re going to need care in 20 years. It’s going to cost you and your spouse more than $1.2 million — money you need to save in addition to your retirement. The majority of people are struggling to save enough for retirement income, so saving another $1.2 million is a stretch.

Whatever option you choose to protect yourself from the expense of long-term care, it’s important you have this conversation with your family so you have a plan for it. We have an aversion to discussing mortality, but it’s so important to have this discussion to avoid any disagreements among kids, or having to race the clock to establish a plan. Have it in place while you’re still sharp and healthy. The irony I see too often is when people are healthy, they don’t want to talk about it. When they become ill and realize they need a plan, it’s too late to get any sort of protection. With anything in life, proper planning will help you avoid a lot of stress and problems down the road. So talk to your family and your financial adviser today to make sure you (and your parents) have a solid long-term care plan in place. It gives you great peace of mind knowing exactly how you will be taken care of and how that care will be paid for.

Kana Aikawa is a financial adviser at Wealth Managing Partners, Inc. She has a Bachelor of Business Administration in Finance and Management from the Shidler College of Business at the University of Hawaii at Manoa. Reach her at 954-7072.