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Rethinking long term care

As you construct your financial plan for the future, give a worthwhile revisit to your long term care plan. As the supply-and-demand relationship of the long-term care niche change so rapidly, it’s vital to reexamine the strategies of our parents’ generation to determine is they really still make sense. And in order to fully understand this, we need to take a deep dive into the current state of long-term care.

First, let's be sure we understand the difference between long-term care, long-term care planning, and long-term care insurance. Long-term care is the niche of the medical industry that provides both skilled and unskilled care to the qualified elderly. The most important distinction to understand is that long-term care is NOT considered standard health care and therefore is not covered by any major health insurance plan, including Medicare.

Typically, long-term care is provided in nursing homes, although there is a growing trend for in-home nursing care. But know that whichever route you choose, it’s expensive. RightCapital estimates that in 2022, the average cost of a nursing home stay is $108,000 per year. Costs for assisted living are half of that, while the estimate for in-home care sits at $60,000 annually.

Those robust costs are what mandate the need for a plan. Everybody needs a plan for long-term care. That plan may or may not include insurance.

In the industry, we like to say that long-term care itself is available to three classes of people: the rich, the broke, and the insured. And you must choose your category. You can choose the path of the “rich” by saving and investing so later you can use your own assets to pay for long-term care outright, should you need it. If you don't have the money to cover this pricy item, then you fall into the “broke” classification and must rely on state Medicaid. Alternatively, you could choose “insure.”

For many years, the wealthy and wise opted for insurance. Good financial sense dictated that offloading the risk of long-term care was a good and cost-effective use of one's assets. However, as the long-term care market has evolved, insurance really only seems to make sense in fewer and fewer cases.

This is a result of a massive supply-and-demand imbalance in the long-term care market. Consider first that people are living longer. As average life expectancy increases, so do the number of long-term care cases, increasing the demand for long-term care providers. Couple that with a short and weakening supply of providers in the industry, particularly unskilled providers. Low wages and high turnover put constant upward pressure on the price for these services.

Insurers, in turn, have chosen to raise policy premiums in order to afford the increasing prices of claims, or to just simply exit the long-term care insurance market altogether. That creates less competition, thereby again driving up prices.

The price escalation is a downward spiral that does not seem to have any end in the near future. And so consumers must now rethink their long-term care plans and evaluate the pros and cons between saving or insuring.

The trend among financial advisors has now turned away from blanket recommendations to purchase insurance and to sincerely consider alternatives. More likely is a recommendation to pour extra dollars into clearing a mortgage rather than buying long-term care insurance. Then, should the need arise, the equity of the home can be cashed in to help fund long-term care needs.

Of course, this approach doesn’t work for everybody. All situations are different, and there are still plenty of places where insurance can make sense. But the key takeaway is that it is no longer a slam-dunk decision. Insurance can be just as damaging to a family’s financial future as the long-term need itself.

Here are five questions for families to consider when adopting a long-term care plan:

  1. How much guaranteed income will be available? From that amount, you can determine how much supplemental income will be required.

  2. What type of lifestyle would you desire in the event of a long-term care need. Do you want to go to a nursing home or an assisted living facility? Is it more important to remain at home?

  3. How is your health? The unhealthy will come out ahead without insurance, where the very healthy are more likely to get value from a claim.

  4. What does the rest of your family want? Whether you like it or not, your long-term care need will impact them.

  5. Which would have a larger negative impact on your plan, expensive premiums during your lifetime or the surrendering of assets just before your death?

Again, there is no rubber stamp for the best policy on how to approach long-term care. Everybody's situation will be different. It is important that you discuss these questions with your financial advisor in the process of constructing a plan or you might discover later that the plan you have built really does nothing to help the reality in which you live.

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