In the newly published third edition of his book, The Truth About Money (HarperBusiness), advisor Ric Edelman teaches the basics of managing personal assets and liabilities. While aimed at consumers, the book could serve as a handy reference guide for advisors (with the caveat that when it comes to insurance, check your state's regulations). In this excerpt, Edelman explains how to cope with the financial burden of long-term care.
Long-term care insurance is an excellent example of how the rules of money have changed. Many people have not dealt with this subject for the simple reason that, until now, nobody ever had the need. In ancient Greece, for example, life expectancy at birth was 20. When the declaration of Independence was signed, life expectancy was still just 23; the median age was 16. Even as recently as 1900, most Americans died by age 47. These figures are confirmed by the percentage of Americans who reach age 65. In 1870, only 2.5% of all Americans made it. By 1990, that percentage had increased fivefold, to 12.7%. Today, 35 million people are over 65--and the figures continue to grow.
We can thank advances in medicine and public health for our newly extended lifelines. In 1900, communicable diseases were the leading causes of death, but today, most deaths result from here-dity, lifestyle, and the environment. How long are people living today? Life expectancy at birth is now 77. People in the fastest growing age group in this country are those over 85. If you and your spouse both reach age 65, one of you can be expected to live to age 90. And 90% of all the people in world history who ever reached age 90 are alive today.
Old cars break down more often than new ones, and the same is true for people. As our bodies wear out, we find ourselves requiring assistance with daily life. Called the Activities of Daily Living, insurance companies typically define these as eating, dressing, bathing, using the toilet, transferring (getting from bed to chair), and maintaining continence. The need for assistance with ADLs is so common, and the cost so large, that more than half the women and about one-third of the men who reach age 65 will spend some time in a nursing home--and the average cost of a nursing home is about $66,000 per year. Moreover, half of all older Americans who live alone will spend themselves into poverty after only 13 weeks in a nursing home. We'll talk more about the cost of care and how to pay for it. But first, it is important that you become familiar with the three types of care:
Skilled Care. Defined as "continuously medically necessary," these cases represent the horror stories about growing old: of people tied to their beds, connected to tubes, suffering from some chronic ailment. But in reality, only one-half of one percent of Americans require this level of care, so unless you have a medical or family history that predisposes you to it, it's statistically unlikely that this will happen to you.
Intermediate Care. This is care provided under a doctor's supervision. Only 4.5% of the nursing home population is in this category.
Custodial Care. All other long-term care patients--95%--receive custodial care, which is little more than room and board. It is based on the mere premise that you're finding it difficult to maintain one or more of the Activities of Daily Living. Often, Mom is in a retirement facility because she cannot live alone at home anymore, and the kids are unable to care for her. And almost always, it is Mom. Wives survive their husbands 80% of the time, and 72% of nursing home residents are women. More than 85% of all women in this country die single--unmarried, widowed, or divorced.
Neither private medical insurance nor Medicare pays for long-term care. It's simply not a medical need. So who pays? You do, until you can no longer afford it. But if you are wealthy and can afford the $66,000-plus annual cost, long-term care may not be a financial concern for you. If you are middle class, you must pay for the cost of long-term care from your income and assets until you run out of money. If you are poor (which is where many in the middle class eventually find themselves) and cannot afford to pay for the care you need, you will be covered by Medicaid.
A Crisis for the Middle Class
In reality, long-term care is a crisis for the middle class. The wealthy, after all, can afford the cost without sacrificing the lifestyle of their spouse or family members. And the poor enjoy a similar advantage, not because they can afford it, but because they are not required to. Thus, it's the middle class that suffers the most, economically speaking. Unfortunately, those in the middle class also have the most misconceptions about who pays for long-term care. Health insurance does not cover this cost. And according to the U.S. Health Care Financing Administration, only under special circumstances does Medicare pay part of the costs of long-term care.
Medicare pays only if the patient has been hospitalized for three consecutive days within the 30 days prior to entering a nursing home (60% of patients fail this test). The facility must be Medicare-approved (only 20% of the nation's 20,000 nursing homes qualify). Even if these two criteria are met, Medicare pays only for the first 21 days in full. Medicare requires a patient co-payment in excess of $100 per day for the next 80 days, and Medicare pays nothing after the 100th day. Medicare also stops paying as soon as your health care provider determines that your condition is chronic and is not going to improve--even if the 100 days are not yet up.
"No problem," you say to yourself. "I'll just become poor and get Medicaid to pay." Before you try that, make sure you know the truth about Medicaid. If you decide to spend down your assets--or if you're forced to--you need to know how Medicaid operates.
Medicaid places your assets into three categories: non-countable, countable, and inaccessible. Non-countable assets include your house (but only if you have a spouse who lives there), car, jewelry, household goods, personal effects, prepaid funeral, and $2,000 in cash. Countable assets include second homes and any additional cars, plus all savings and investments, including CDs, stocks, bonds, mutual funds, annuities, IRAs, and retirement plans--even the cash value of your life insurance policies. Inaccessible assets include gifts and anything placed into irrevocable trusts. These assets will be deemed by Medicaid to be exempt transfers (meaning gifts or transfers into trusts will be allowed) or non-exempt transfers (meaning the gifts or transfers are disallowed). If the transfers are deemed non-exempt, Medicaid will deny benefits for a period of time based on when the non-exempt transfers occurred.
Under Medicaid rules, the community spouse may keep non-countable assets, but is forced to liquidate countable assets. Furthermore, in most states, the community spouse is allowed a monthly income of less than $2,000; the institutional spouse is allowed $30 to $40 per month. Medicaid takes all income above those amounts, including Social Security income, pensions, interest income, annuity income, and alimony payments.
Although Medicaid will not take your house if a spouse lives there, you will lose your home when your spouse dies or goes to a nursing home. When your house eventually is sold, Medicaid will recover the sale proceeds--even if it has to wait until after you've died to do so.
The solution? Clearly, Medicaid will pay only if you have few assets. Logically, then, make sure you don't have assets. Therefore, transfer your assets to your children now. This will make you poor, and by being poor, you'll qualify for Medicaid. If you don't transfer your assets to your children, you'll just spend everything you own on long-term care costs until you have nothing left anyway. Either way, you'll be broke. So wouldn't you rather give your assets to your kids instead of to a nursing home?
If you think this sounds reasonable, watch out for some big problems. You'll find it very hard to give everything you own to your kids just as you've reached that time in your life when you can start enjoying yourself. In other words, this recommendation usually doesn't go over very well.
If you made gifts during the 36 months prior to filing your claim for benefits, Medicaid will deny the claim--60 months for gifts you make to a trust. This rule is specifically intended to prevent people from asset-shifting. And please note an important change in Medicaid rules: If you file a claim at any time during the 36-month waiting period, Medicaid will restart the clock. Therefore if you plan to use this strategy, assets must be transferred well in advance of the need for long-term care, and be sure you don't file a claim until you're sure the 36-month waiting period has expired. Also, be aware that transferring assets to a spouse does not shield the assets from Medicaid.
Under gift tax rules, you may give to any one person only $11,000 per year (you may give unlimited amounts to your spouse, but doing so has no effect). So, even if you try to give your money away, the IRS will restrict the speed with which you may proceed. And remember that Medicaid is funded by taxpayers to help the truly needy of our society, not as a middle-class tax-dodge to protect your assets.
Congress knows that few consumers have the imagination or knowledge to effectively execute an asset-shifting strategy. So, to discourage professional advisors from sharing this information, Congress passed a law that made it a felony for advisors to counsel or assist consumers in their efforts to shift assets. Therefore, don't bother asking a lawyer, accountant, or financial advisor for help; the smart ones won't provide it.
For all five reasons noted above, transferring assets is not as simple or as easy as it first appears. This is why some eldercare attorneys suggest divorce. The institutionalized spouse leaves all assets under a divorce decree to the community spouse; Medicaid cannot claim assets transferred in such a manner.
This isn't necessarily a great idea, either, because the same ethical problem exists as noted above. And if you thought it was tough for Mom and Dad to handle the thought of giving everything to their kids, just try to get them to file for divorce after 45 years of marriage simply because one of them is declining in health. In addition, Medicaid is aware that many couples are divorcing for economic, rather than marital reasons, and the agency is starting to challenge this strategy. If Medicaid wins, as much as half the marital assets return to the institutionalized spouse, which Medicaid then can seize.
This gets us to long-term care insurance. Although buying insurance is never fun, given the alternatives of transferring assets or getting a divorce, it is the least evil choice. For that reason, clients who are not independently wealthy should consider buying a policy, even as early as age 40 or 50.
The cost of coverage is related directly to your age at the time you buy the policy (rates are unisex; there is no cost difference between men and women--not yet, anyway). Since a person age 50 is not likely to file a claim for 20 years or more, the carrier has many years to collect premiums. Thus the cost for that 50-year-old is quite low--about $150 per month in many cases. That's extremely affordable, especially considering that the cost of policies skyrockets with age. If you don't buy a policy until age 65, the cost could exceed $3,500 per year, or $7,500 by age 75.
Many feel that buying a policy in their 50s is unnecessary, since it is likely to be years or decades before they'll need the coverage. (But it's more likely than you might think: 11% of nursing home residents are under age 60. Most of them are victims of accidents, which can occur at any age.) Although it's true that a 50-year-old is unlikely to need the coverage for many years, it nonetheless makes sense to buy it young.
A 50-year-old pays 30% less in total payments over his lifetime than a 75-year-old and is protected for 35 years instead of just 10. The insurance industry is sending a clear message: Buy this policy when you're young, because you'll save a lot of money in the long run.
And you're more likely to qualify for it--another reason you need to protect yourself at younger ages. On the application form, you'll be presented with a list of medical conditions. If you have any of them, you will be declined or asked to pay a higher premium. But at age 50, when you're unlikely to have symptoms, you are better able to get the coverage. Thus, you need to buy a policy when you're young enough to afford it and healthy enough to qualify.
The Seven Necessaries
There are seven features to look for in a long-term care policy. The first is $180 per day in coverage. This approximates the current cost of nursing homes. You can obtain more or less coverage, with corresponding changes in cost. Remember: Many people do not need a policy covering 100% of the cost of care because of other income sources. Depending on your situation, you might be fine choosing reduced benefits in exchange for a more affordable premium.
Also look for at least three years of coverage. Five or six years of coverage is better, and you should also consider lifetime benefits. After all, more and more people are entering assisted living facilities, and many others receive care in their own homes. So even though fewer than 2% of residents stay in a nursing home more than five years, you need to think beyond nursing homes, for long-term care is much more than just that.
A 90-day waiting period is in order. Delaying the start of benefits is an excellent way to reduce the premium. But this means you self-insure for the first 90 days, which could cost you about $18,000. Make sure you have enough in cash reserves to afford this outlay. And buy inflation protection. Because the cost of care will increase over time, you need to make sure that the benefit amount you buy today maintains its purchasing power in the future. Inflation protection is a must for those under 70, and still suggested for those over 70.
Is there a gatekeeper who certifies that you are not able to perform two of the Activities of Daily Living that qualify you to begin receiving payments from your policy? Ideally, it will be your doctor who makes that determination, not someone from the insurance company. Likewise, how disabled must you be in order to receive benefits? Some policies say you must need "substantial" assistance, while others say you need "hands-on" assistance. You want a policy that offers the most liberal definition, or you could find your claims delayed or even denied.
Make sure a "waiver of premium" is included. This allows you to stop paying premiums once you've received benefits for 90 days. And include home health care. When it comes to nursing homes, people wait as long as possible to go, and they return home as quickly as they can. This crucial feature, which is found in almost all policies these days, pays for adult day care or for home visits by a nurse or home health aide to assist you with medication, dressing, bathing, preparing meals, eating, and using the toilet.
But make sure the home health care benefit is the same as for care in a facility. Some policies pay only 50% to 75% of the regular benefit for home care. Also try to find a policy that pays for housekeeping chores, meal preparation, and clothes washing, in addition to medical and ADL services. Especially good are policies that pay for home modification (to install wheelchair ramps, grab bars, and the like) as well as respite care and care advisory services.
As with disability insurance, never buy LTC coverage based on cost, because the cheaper the policy, the less likely it will meet your needs.