Risks of SELF-FUNDING Long-Term Care

Who needs Long-Term Care?

Forty percent of people
currently receiving long-term care in the US are adults 18 to 64 years old.

 

The most significant Long-Term Care government programs – Medicare and Medicaid – are, at best, very limited. Private funding for this need entails the use of personal resources: savings and investments, annuities and life insurance, and the equity in one’s home or long-term care insurance, a product that is specifically designed for this need. For some, self-funding the long-term care risk can be accomplished without an LTC policy; however, for many, it represents the best way to address a risk that is very likely to materialize.

Self-Funding for Long-Term Care.

As the term is used here, self-funding refers to paying for long-term care costs out-of-pocket with personal or family income, savings, pension benefits, stocks, bonds, and other investments. Contributions from children or other relatives may also come into play. Any financial product designed to grow and accumulate funds can be used as a way to save for future long-term care needs. However, most people find that, even when done in advance, saving a sufficient amount every month or every year for long-term care expenses is extremely difficult. Those who are older may not have enough time to ensure funding is complete.

When considering the best options to fund the costs of long-term care, the focus should be on what the cost of care will likely be in the future. The cost of all aspects of health care continues to increase; long-term care is no exception. The following chart projects today’s costs into the future, using an assumed annual increase of 5 percent. The significant sums that will likely be needed are considerable; for many citizens, they may be unattainable.

The risks of self-funding long-term care costs for even the most prosperous individuals are significant. They include:

  • Not being able to define future long-term health-care needs.
  • Not knowing when long-term care may be needed.
  • Not wanting to “sacrifice” money toward care that is intended to be passed on to family members and dependents.-Losing the ability, through dementia or similar cognitive failure, to understand on what type of care the money should be spent.

Generally, self-funding is possible only for individuals with above-average wealth. Those whose disposable incomes exceed the cost of care are the best candidates for self-funding. For most others, attempts at self-funding could exhaust assets, eventually leading to reliance on Medicaid or other public resources. Self-funding can also take the form of relying on or expecting family members or loved ones to provide needed care. Depending on family and loved ones is certainly possible, but it ignores the realities of long-term care: that it can affect the quality of life of the caregiver, that the need for care will likely be ongoing and sustained, and that the caregiver may not be able to deliver the level or kind of care needed.

Long-Term Care Insurance

Though the means to self-fund the cost of long-term care are many and virtually any financial instrument or personal asset can be used for this purpose, the reality of long-term care presents significant challenges:

  • The cost of the care is extremely high. Funding the need adequately requires thousands upon thousands of dollars. For high levels of care necessary over an extended period, the cost can be measured in hundreds of thousands of dollars.
  • The likelihood of needing care is fairly high. It is estimated that about 70 percent of individuals over age 65 will require at least some type of long-term care services during their lifetimes.
  • It is very difficult to predict when the need for care—and thus, the need for the funds—will materialize. It could be years into the future or it could be next month. Likewise, it is difficult to predict the level of care that may be required.

For these reasons, and for individuals other than the very wealthy, none of the private resources described so far in this unit can be relied on to fully meet the LTC funding need. None can ensure that necessary money will be available in adequate amounts when it is needed. Fortunately, there is another private resource available for LTC funding—one that is designed specifically to meet the risk and cover the need: long-term care insurance.

Long-term care insurance covers the risk of long-term care and pays benefits for policy holders that need care services and support. Though it will be discussed in detail in the next units, an overview is appropriate here. There are many types and forms of long-term care insurance, with many combinations of benefits and coverage. For example:
-A policy may cover the cost of care in all kinds of settings (a comprehensive policy) or only care that is delivered in the home or in a nursing facility a non-comprehensive policy).
-The policy holder may select from a range of daily benefit amounts the benefit the policy will provide (such as $100, $150, or $250) and the period that the policy will cover (such as one year, three years, five years, or a lifetime).
-A policy may provide benefits on an indemnity (specified amount) basis or on a reimbursement basis (actual costs incurred), up to the daily amount.
-A policy may be tax-qualified (in which case the premiums are deductible) or non-tax-qualified (in which case the premiums are not deductible).
-If it conforms to certain state and federal guidelines, a policy may be a partnership policy, which would make the policy holder eligible to participate in the state’s long-term care partnership program and allow him or her to retain a greater level of assets than otherwise allowed should he or she ever need to apply for Medicaid assistance.

Both individual and group LTC policies are available. Coverage considerations include the benefit amount, the elimination period, inflation protection, non-forfeiture protection, and other features.
Underwriting requirements vary depending on the insurance company. Most insurers are unwilling to accept applicants who already have serious medical problems or who are already receiving care. The younger the applicant, the more likely coverage will be granted and the lower the premium. Like all insurance products, cost is also determined based on the features and options chosen.
Summary Private funding for long-term care makes use of the income, assets, and personal resources an individual may have. Virtually any type of savings or investment product can be used for this purpose, as can the equity in a home. However, the cost of long-term care can be extraordinarily high; for other than the very wealthy, relying on personal income and assets may fall short of adequately covering the need. For many, long-term care insurance may be the best option. The many different types and forms of LTCI enable citizens to customize the type and level of coverage that is best for them and, to some degree, to control the premium.

 

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