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According to a study published in The New England Journal of Medicine, 33 percent of men and 50 percent of women in the U.S. over age 65 will face a need for long-term care at some point. Women are somewhat more vulnerable to this need than men, because they live longer and are more likely to be single at older ages. And, sad as is it to think about, almost everyone needs some degree of care for some period of time in the twilight of their days.
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Now is the best time to start learning about long-term care. By planning ahead, it is possible to integrate long-term care protection into retirement and estate planning, and avoid losing your estate to nursing home costs or becoming a burden on family or friends or relying on government assistance.
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What”™s the cost?
The cost of long-term care can be minimal if you can count on a loved one or friend being available to care for you day in and day out in your or their residence. When that is not a viable solution, skilled or semi-skilled help has to be obtained either in one”™s own home or elsewhere.
In New York state, the average cost of a home health aide is approximately $25 an hour. In the worst case where you need assistance 24/7, that adds up to more than $200,000 a year. Care in a nursing home facility in a semi-private room averages some $100,000 in New York state (more in urban areas). And, unfortunately, these costs are growing much faster than the overall cost of living.
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Who pays?
Health insurance and Medicare (for those over age 65) do not cover most costs of long-term care. Thus, the bulk of long-term care cost falls on two funding sources: Medicaid and personal savings. Medicaid, a welfare program jointly funded by federal and state government, supports long-term care for the indigent. In recent years, Medicaid has funded approximately half of the total costs of nursing homes in the U.S. But the catch is that you must qualify to have nursing home bills paid by Medicaid, which usually means spending down virtually all your assets. Also, you must agree to receive care in a Medicaid-approved facility, and there is no guaranty that the facility will be near where you or your loved ones live.
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One of the best ways to start planning for paying for long-term care is to learn about a financial solution called long-term care insurance (LTCI), and how to evaluate it intelligently. LTCI has become a bedrock financial solution for protecting retirement savings against the rising cost of long-term care and to avoid Medicaid and, in some states (including New York), be able to qualify for Medicaid without completely impoverishing yourself. This coverage also adds to your confidence that you won”™t become a burden on others, and that your other important financial goals, such as leaving money to your children or grandchildren, will be met.
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Evaluating programs
Once you decide to evaluate a LTCI program, it”™s a good idea to ask a qualified financial professional for assistance. The ideas below can help you discuss choices as you explore the marketplace.
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Evaluate the financial strength of the insurance company and its premium history. This coverage has to last a long time so analyze how the leading financial rating agencies rate the company”™s financial strength. Further, LTCI policies should provide for “guaranteed renewability,” meaning that, so long as you pay the premiums, you can keep the policy for the rest of your life. However, no LTCI policy guarantees that the premiums will not increase.
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Insist on a “qualified” program. This status simply means that benefit payments are federally income tax-free up to a limit and premium payments are generally tax-deductible on a similar basis as other health insurance.
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Choose full coverage and evaluate enhanced benefits. The best programs cover three types of care: nursing home, community-facility based and home health care. Beware of programs that cover home health care only under limited circumstances or that significantly cap the amount of the benefits under the policy that can be used for home health care. In addition, some programs will offer a significant discount if a couple is covered at the same time or will enable one spouse to use benefits that the other spouse does not use.
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Analyze the right amount of benefit to purchase. LTCI benefits typically are expressed in terms of a “per diem (day)” benefit that begins after a specified “elimination” period and then continues for a set period of time (up to and including one”™s lifetime). Make sure you have sufficient resources to pay for care until the policy starts doing so after the elimination period ends.
Select a compounding automatic annual benefit increase. Most programs offer you an option of having the daily benefit under the policy increase each year to offset the increasing costs of long-term care coverage. Carefully choose how much that increase is and whether it increases on a “simple” or “compound” basis.
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Joe Biegel, CFP®, J.D., works with Associated Benefit Consultants and is a financial adviser of Park Avenue Securities in Rye Brook. Reach him at JBiegel@AssociatedBenefit.com.