Categories: Risk Management/Insurance
      Date: Mar 13, 2010
     Title: The Long Term Care Planning Decision (Part 3)

Planning for retirement is difficult. If you just knew how long you are going to live, what inflation and tax rates are going to be, and how the markets are going to perform it would reduce the challenge tremendously. However, among the other unknowns is the risk that you or your spouse will require significant long term care (LTC) expenditures that could potentially overwhelm your savings. In Part 1 of this series this risk was described--and it's not for the faint of heart. For example:

• The 65 year old American male has >33% chance of requiring care in a nursing home. For the 65 year old female the probability is >50% .
• There is a >50% probability the nursing home stay will be longer than one year.
• In 2009 the average cost of nursing home care in the U.S. (and Boise, specifically) was about $200 per day, or >$70K per year.

Many people simply ignore these risks when doing financial planning for retirement. (Actually, many just fail to do financial planning--period.) They blow off these real risks with casual or foolish remarks like, "Just shoot me if it comes to that." Or, "I'll just move in with the kids." Or, my favorite, "Doesn't Medicare or Medicaid pay for that?" Unfortunately, these attitudes demonstrate a lack of responsibility and concern for your loved ones. Please take time to consider:

• Your spouse or children are not going to take you out back and shoot you to prevent you from going into a nursing home. They are going to be very concerned about you receiving the best, most compassionate care possible, at home or, if necessary, in a quality facility. Having the financial resources and/or long term care insurance (LTCI) will give them the ability to do this. If you don't plan and have these resources available when needed, you put your loved ones at tremendous financial risk. The risk isn't yours, it is theirs--and it really isn't loving or fair to put them at risk unnecessarily.
• You may plan on moving in with your adult children for long term care, if necessary. This is the way things used to be done, and may be still be a reasonable plan. However, have you discussed this with your children, and are they "bought in" to this plan? Remember that your adult children may be struggling to provide for their own families, fund your grandchildren's education, and save for their own retirement. Don't underestimate the financial and emotional burden you may be to your children, not to mention the commitment of their time and energy. If they are ready and willing, great. Just be aware, there is a risk their situation may change for the worse (think job loss, cancer, divorce, etc) in the intervening years, and they may not be in a position to care for you.
• Relying on the federal and state governments to take care of you is not a solid plan. Medicare only covers part of the first 100 days in a nursing home. Maybe the government provided benefits for LTC will be increased, due to the demand of aging baby-boomers who have failed to plan for their own care. Don't count on it, however. Who is going to pay for this?
• In many ways, Medicaid has become the default LTC insurance for the middle class. However, having private LTCI or your own financial resources may be critical in you obtaining the type of high quality care you expect. Medicaid is unlikely to provide the level of service you want. Besides, call it what you want--Medicaid is welfare. Do you think it is fair to have your neighbors and fellow citizens pay for your LTC, if with proper planning, you could have done so yourself? Are you willing to pay higher taxes today to provide for others who could have paid for their own care?

Many people may be convinced of the risk that future LTC requirements represent, however they can't bring themselves to purchase LTCI. Since less than 10% of adults have any sort of LTCI, most have either ignored the issue, or have said no to LTCI for at least the present time. Although passing on LTCI may not be the best long term decision for them and their family, it is totally understandable. We hate long term care insurance because:

• The LTC risk is not perceived to be a present risk. When we buy car, homeowners or health insurance, we are insuring against the present (i.e. this year's) danger of an accident, fire, theft, illness, etc. These dangers are perceived as imminent, whereas the risk of needing LTC is predominately one that is far in the future. Even when we buy term life insurance, we perceive value in the protection against an untimely death today, tomorrow, or for the length of the term.
• Since the main risk of LTC is far in the future, we don't like the idea of paying for it today, with the obligation of continuing to pay for virtually the rest of our lives. The arguments for buying LTCI earlier rather than later--it's cheaper and there is less underwriting risk--aren't compelling enough for us to purchase now. After all, wouldn't the wisest financial decision be to put off buying LTCI until right before you need it? That is a great plan if you can pull it off. Just remember, it may be impossible for you to get insured if you wait too long--just like it is too late to buy fire insurance when you hear the sirens and smell the smoke.
• Unlike automobile and homeowners insurance, we are not required to purchase LTCI--although in some respects, maybe we should be. When we don't buy LTCI we may be passing off our financial risk to our spouse, children, or the government (i.e. your friends and neighbors) without their consent. Many expect Medicaid to step in and cover our LTC costs, but would never expect the government to rebuild the house or fix the car of the uninsured.
• If we don't use the LTCI, we generally lose all the premiums. Of course, this is the nature of insurance. If we don't get in a car wreck, we lose all those premiums. If we don't have a fire, we lose all those premiums. If we don't die, we lose those life insurance premiums. However, this seems to really bother people with LTCI. (For what it's worth, I would much rather pay years of LTCI premiums and never have to use the insurance, than to save all those premiums and spend the last years of my life in a substandard nursing home on Medicaid.)
• LTCI is complicated. The purchase decision is made even more harder by the difficulty of anticipating your needs far into the future.
• We don't like to think about getting old or needing LTC in a nursing home, any more than we like thinking about an untimely death. However, most of us (or at least those reading financial planning blogs) have been responsible and have purchased life insurance (and maybe disability insurance) to protect our family from such risks. Evidently, it is more acceptable to shirk the responsibility for planning for LTC.
• There is no joy in LTCI. Unless we have a surplus of funds in retirement, the commitment to paying LTCI premiums for the rest of our lives generally means having to give up something we like better. Maybe it's fewer vacations or fewer dinners out. Maybe it is giving less to the grandkids or being on a stricter budget. Maybe it is a smaller inheritance for the kids. However, when compared to consciously self-insuring (i.e. setting aside funds for LTC, in case you need them), purchasing LTCI may actually buy you some freedom. If you know that the potential for LTC has been dealt with, you may be able to spend the rest of your retirement nest egg more freely.

Maybe you are convinced that planning for your own long term care is the right thing to do. Purchasing LTCI isn't right for everyone, but certainly more of us should be buying LTCI than are currently. And, a thorough consideration and thoughtful discussion of LTC issues with your family is certainly an important part of all of our financial planning. If you are approaching retirement, don't avoid it any longer.