Future long term care costs present a challenge in many ways. It is hard for individuals and family's to understand what the problem is unless they experience it with a loved one or friend. Part of the solution is money but there are other necessary pieces of the puzzle as well as different decisions to make.
Three ways to pay for future long term care expenses
1. Buy long term care insurance which is structured to provide a daily benefit for a set period of time. This is the most comprehensive solution for institutional or at home care services and also the most costly as well as having its own risks:
2. Have an agreement with family or friends that they will take care of you as best they can in your home or their home. This can be considered a kind of retro solution although I see this more frequently among my clients lately. Why? Because individuals and families have not prepared for the caring situation and the attendant expenses.
a. increasing premiums resulting in surrendering the policy at the time of life you most likely might need it.
b. financial health of the insurance company.
c. costs of long term care exceed your insurance either in daily costs or the time period your insurance is in effect.
d. underwriting standards are becoming tighter so you might not qualify.
e. it does not cover your costs unless you are diagnosed with cognitive dysfunction or lose 2 of 6 activities of daily living. For instance my parents who are 95 live in a retirement home that basically provides custodial services with independent living. None of their costs would be covered by a long term care insurance policy.
3. Self insure. Use a percentage of your own assets to set aside for future health care expenses. One of the problems with long term care insurance is that individuals do not like the "use it or lose it" nature. Unlike homeowner's insurance where you hope you never have to make a claim and you pay premiums every year, long term care insurance is viewed through a different framework. It is a real problem. In my opinion a more effective framework to use is view LTC insurance as a total $ benefit. If you purchase a policy for 3 years with benefits of $200/day the total benefit is approximately $216,000 minus the elimination period of 90 days or $18,000. If you pay premiums of about $3,500/year for 20 years before you collect your benefit that adds another $70,000 to the cost. I am leaving out any benefit escalation and time value of money. Trying to make it simple. If you can set aside $200,000 and add funds each year to that bucket-say $3,500 then you have self insured for a high % of future potential costs. Remember that any social security benefits you receive will contribute to paying for these costs as well as any pension distributions you are receiving. Also if you don't spend these funds they become yours to pass on to your estate. So as you can see there are many potential solutions with many pros and cons. It is important to pay attention to this issue as your develop your plans.
As far as planning for an aging relative's long term care expenses it behooves you to discuss their wishes and use of resources to maintain their quality of life. If you have a parent or adult child who depends on income from you it definitely has a big impact of your planning. You need to pay attention to this as a future liability and be thoughtful and intentional about how you will address this.