How would you cover the cost of long-term care? It's a question most people can't answer, and understandably so. The cost of care is high, and rates for long-term care insurance have risen sharply.
On yesterday's MoneyWise Live, SMI managing editor Matt Bell joined Rob West and Steve Moore to talk about ways to prepare, and also about the question of how much preparation is really needed.
To listen to Matt's segment, click the play button — or, if you prefer, scroll down to read the full transcript below. (And for more radio appearances by members of the SMI team, visit our Resources page.)
MoneyWise Live airs daily at 4:00 p.m. ET/3:00 CT. It's produced by MoneyWise Media and Moody Radio.
To ask a question on a future program, call 1-800-525-7000 and mention you have a question for either Mark Biller or Matt Bell of Sound Mind Investing.
Steve Moore: We're discussing all things financial today on MoneyWise Live, and if the phrase "long-term care" makes your heart jump just a little, there's a good chance you're a baby boomer or even older. And if you look at the cost of long-term-care insurance, well, your heart may stop completely today.
We're joined by Matt Bell from soundmindinvesting.org. Matt recently wrote a very informative article on this for the SMI newsletter and Rob is going to help us understand this topic just a bit better. We can use his expertise.
Rob West: We sure can. You know, we get so many calls and questions on the topic of long-term care. Most people ask about whether or not they should buy long-term care insurance, but what I really appreciated about what Matt did in his article, "Long-Term Care How Would You Cover The Cost?" — that's the title, at soundmindinvesting.org — is he really unpacks what long-term care is, what is the true cost, who will need it, and then looks at the alternatives. One of those being insurance. So we're going to unpack this today.
Matt, great to have you with us.
Matt Bell: Rob and Steve, great to be with you guys.
Rob West: Absolutely. Well, let's dive in there. Why don't you bring some definition, Matt, to this often misunderstood topic, and that is what is long-term care.
Matt Bell: That's a great place to start because there are a lot of scary headlines out there. In fact, one of the most common statistics you see bandied about is that 70 percent of 65-year-olds will need long-term care at some point in their remaining years. So people think that long-term care means nursing home care. It does not necessarily.
By definition, long-term care is really about the so-called activities of daily living. Somebody that needs some help with bathing, dressing, getting around, maybe going to the store and cooking.
So it's really a good starting point to understand that when you see a scary headline about the potential need for long-term care, well hey, a lot of us will need some help with some of these things, but it is not necessarily medical care, nor is it necessarily nursing home care.
Rob West: Absolutely. And you help us understand who will actually need it. There are percentages that we see thrown around about what percent of the population over age 65 will eventually use this type of care. Help us get our hands around how many on average will actually need this type of care you just described?
Matt Bell: Yeah, it's kind of the process of peeling back the onion. So with that starting point of 70 percent of 65-year-olds potentially needing some long-term care at some point in their life, then you drill down one level and you find out, well, there's also a distinction called a "high need for long-term care." That's the need for assistance with two or more activities of daily living. And when you peel it down to that level, now comes down to around 50-some percent are going to need help at that level.
But I think what most people start to get worried about is nursing home care. So there are some statistics specifically related to that. For example, 56 percent of people in their late-50s and early 60s will spend at least one night in a nursing home. Well, it's pretty common to be released from the hospital and have to have some rehab at a nursing home, so even that really shouldn't be quite as scary as you might imagine.
But I think where it really nets things down, there was a Rand Corporation study that said that someone who's currently in their late-50s to early 60s has about a 10 percent chance of spending three years or more in a nursing home, and I think that kind of gets down to the essence of the topic.
Rob West: Yes. So that's why when we get to insurance, many of these products that are being sold have a period by which they'll pay for those expenses, and often they mirror what the average person will need in terms of long-term care. Let's get to that in a moment.
Matt, help us understand the true cost. If we're in this percentage where we'll need this type of care, whether it's in home or in a nursing home or a with a private room or even just an assisted living facility. Help us understand what that's gonna look like because some pretty big numbers are often thrown around.
Matt Bell: Yeah, that's right. One of those big numbers is that the median cost of a private room in a nursing home today is nearly a $100,000, so that's a pretty scary thought. Now, for one thing, that cost varies quite a bit depending on what state you live in. If you have the unfortunate situation of living in Alaska, and I don't mean any disrespect to folks living in Alaska, but the cost of nursing homes is incredibly high in Alaska. About $24,000 a month, but then it comes down from there. So in Oklahoma, it's less than $5,300 a month. So the cost really varies quite a bit depending on where you live.
Rob West: Yeah, absolutely. So we understand kind of what it is and it's really all built around these activities of daily living, the cost, the percentage of folks who will need it and how long it's typically needed. Then we kind of find ourselves with this dilemma of, okay, how am I going to cover that cost? And there are a number of alternatives, one of those being long-term care insurance. So help us understand those.
Matt Bell: Yeah, let's back into that one a little bit if you don't mind. When you look at who pays for long-term care, well, Medicaid and Medicare pay almost three-quarters of all the money spent on long-term care. Medicare and Medicaid cover about 75 percent of those costs.
Now it's important to point out right away that Medicare is not set up to pay for extended nursing home stays. So when Medicare is mentioned in the context of long-term care, that's typically in a situation where somebody is being released from a hospital to a nursing home facility for rehab, in which case Medicare pays for the first 20 days and then a portion of the next 80. But then Medicaid, for people that have pretty low incomes and low asset levels, that does pay for nursing home stays.
And so again, to bring it down, to make it a little bit more personal, about 17 percent of all of the nursing home expenses are paid out of pocket. There was one other interesting study by the Rand Corporation that found that just 5 percent of all of us will end up spending any more than $47,000 on long-term care. So again, for some people, a relatively small group of people, the cost of long long-term care could be exorbitant, could be devastating if you're not ready for it. But really it's a pretty small, relatively small number of people.
Rob West: Yeah, that's 17 percent number is interesting. Help us understand what's behind that. Why, why is that so small?
Matt Bell: Well, because again, Medicare and Medicaid are covering nearly three-quarters of the costs of long-term care. And then private insurance covers about 11 percent and that mirrors pretty much exactly the percentage of people age 65 who have a long-term-care insurance policy.
Rob West: Interesting. All right, well, that's helpful. So I think we see that we're not trying to cover the full amount necessarily depending on your situation, but clearly, as you said, depending upon how long it lasts and what type of care you need, it can still be a pretty expensive proposition. So as we look at the alternatives, Matt, one of the opportunities is that we have family support. I mean, this has historically been the way going back all the way to Bible times that this care was provided. It was families, you move in with relatives and they care for you. That's not always a solution depending on whether you need skilled care, but that is an option, right?
Matt Bell: Absolutely. In fact, a lot of the long-term care that's going on in this day and age is still being done in the home and 80 percent of that care is being provided by a spouse or an adult child or a friend. It's unpaid care that's being delivered in the home. And so that's definitely viable. And in fact, I think it brings up an interesting point for people that are getting up in their 60s and 70s to think about where are they going to live.
I know somebody whose parents moved when they were still fairly healthy to be close to him and another relative of his that also lives in the area. And sure enough, shortly after they moved, the mother and the situation had some heart issues went into the hospital. Now she has local support so her adult children can go visit her, help out with her care. It's really hard for someone who's doing just fine in their 70s to imagine a day when they're not doing so fine and needing some care. But it's really wise to think about, hey, maybe I should live in a place where I've got some care available to me like that.
Rob West: Absolutely. Matt what about self-insuring essentially where you're taking personal investments in funding, any long-term care needs that you have? Are there any rules of thumb that say, okay, if you have assets under this amount, you should really be thinking about, self-insuring because that's where government care is going to be, or assistance is going to be so needed versus what you have assets over this amount. You almost always can self-insure. How should we think about funding in ourselves?
Matt Bell: That's a great question. And there was some interesting input from the Society of Actuaries who as you imagined, we're crunching some numbers on this thing. What they concluded is that if you've got a net worth of over $2 million — that's a small group of people — but if you're blessed with assets of over $2 million you could, according to them, and consider yourself to be self-insured. Now, even those folks still might want to provide or pick up some coverage to protect some of that wealth should they have a higher risk of need for long-term care. But that's the threshold where they said generally from a financial perspective, you might want to think of yourself as being self-insured.
Between $250,000 of net worth and $2 million is kind of what they said is the sweet spot for perhaps you should consider more seriously picking up some long-term-care coverage because you've got enough assets to make it worth protecting, but not so many assets that you could really think of yourself as being self-insured.
And if you have less than $250,000 in net worth, their recommendation is you probably don't need long-term care insurance. For one thing, you may have difficulty affording a policy and for another, the cost of care will soon, unfortunately, eat up a lot of that net worth to the point that you'd probably qualify for Medicaid.
Steve Moore: Matt, you mentioned just a moment ago some people you knew where the parents, even though they were in their 60s and in good health, moved back to be closer to their adult children. Then, lo and behold, a situation arose where that turned out to be a good thing because the mom then got ill. Is this something that adult children need to be thinking about? Will mom and dad be moving back to be close to us? Will we or should we prepare to have mom and dad maybe move in with us?
I'm not sure how adult children would view this. Some might see it as the Christian thing and the loving thing to do, and other adult children might look at this scenario and think, "Oh no," you know, "Why us?" So what should be a — from a Christian perspective, how should we view and how should we prepare for this?
Matt Bell: There's a lot of complexity to that question. It's a great question, but a lot of complexity to it. It has a lot to do with your convictions as a Christ-follower as you're highlighting. Has a lot to do with your relationship with your parents and also your ability to provide care. I mean you might be at a season of life where you're busy raising children on your own or perhaps both parents working in your household, it might be a challenge. But I definitely think that going back to an earlier time, you guys alluded to where multiple generations are caring for each other is really a pretty ideal situation.
Steve Moore: Yeah.
Rob West: Excellent. We've got to head to a break Matt but when we come back, I really want to dive into long-term-care insurance. This is an industry that has changed quite a bit over the last few years as these companies have gotten better and better at pricing these policies, as you said, they can be expensive, but there's a number of things I think our listeners need to understand. So we'll tackle that in just a moment.
Rob West: Matt, why don't you set the stage for us here because the industry, as I mentioned before the break, has gone through quite a bit of change as they've really become more familiar with what it actually costs to deliver this benefit over time. Give us a sense of what's happened there.
Matt Bell: There's been a lot of upheaval in the industry. There used to be hundreds of companies writing long-term care insurance policies today. I think it's down to around 12. And so a lot of companies, as you said, they underestimated the risk. They thought that many more policyholders would end up dropping their policies than turned out to be the case. We're in a low-interest rate environment so their investments for their companies have been less than what they anticipated. It has created a lot of pain for them, which has been passed down, unfortunately to many current policyholders who are being hit with really high rate hikes.
Rob West: Yeah. And they can't increase the policy, the premiums on an individual basis, but they can do it on a group basis. Correct?
Matt Bell: That's right. So a group could be all policyholders with an inflation benefit of 4 percent. You're absolutely right. It's groups of policyholders.
Rob West: And what counsel would you give to someone in that position? They have a policy. They've been notified about an increase. Perhaps it's beyond what they imagined they would be spending. They may even be questioning whether they can still afford it. How should they think about that?
Matt Bell: Yeah. There are three options. They could bite the bullet and pay the higher cost, not very appealing. Typically they'll be given the option to reduce some benefits in order to keep their premiums the same or close to the same. Or they could then drop the policy, but if they had the initial need that prompted the purchase initially, they probably still have the need. So I think that's a less desirable option as well.
But a lot of those earlier policies were pretty generous. High inflation factors, long provisions of care. So if you went down from a lifetime policy down to 3-to-5 years of care, if you went from a 5 percent inflation factor down to 3 percent, those sorts of trade-offs could potentially enable you to keep your premiums the same.
Rob West: Yes. So if I'm somebody who has not purchased a policy, I'm considering it. Should I feel better about the fact that there are fewer carriers, this industry is more mature, that perhaps these increases are a thing of the past?
Matt Bell: Well, the good news is the large increases should be but, but not always, not with group policies, so be a little bit careful there. But with the individual policies then yes, a lot of that's been baked into the current pricing, but the current pricing has gone up quite a bit. Versus those older policies as have the underwriting standards. So a little bit of good news, a little bit of bad.
Rob West: Yes. And what age is ideal as somebody is thinking about the optimal time to consider getting into one of these policies?
Matt Bell: Yeah. Typically, mid-50s to early 60s would be the sweet spot to start getting some quotes. Definitely go to an A.M. Best sort of company to look at the ratings of these companies. You want a strong company that has the wherewithal to meet its claims and a company that writes a lot of policies in this area.
Rob West: Yeah. Obviously, they come in all shapes and sizes, Matt, in terms of the benefit, the riders. So help us get our hands around — I realize we can't go deep here — but help us get our hands around what we should be thinking about, what questions we should be asking as we're considering these various options in a policy.
Matt Bell: Well there are a lot of different factors that affect the cost. So you're waiting period. So if you've got a 12-week waiting period, you're going to pay more than if you've got a six month waiting period. If you — your monthly benefits, if you've got a $7,500 a month benefit versus a $5,000, that'll affect the cost. How long the coverage would last. Is it three years? Is it five years? Those sorts of things. Certainly, your health will factor in. So those are some of the key things, but then inflation riders as well.
So one idea for people that might be a little bit set back by the price of policies today, you might consider, it's not really an all or nothing decision you might consider taking on enough coverage to take the sting out of a potentially costly long-term care need, but perhaps not get the Cadillac of plans.
Rob West: Yeah, I like that. Before we're out of time here, Matt, give us a couple of other alternatives as we think about this coverage.
Matt Bell: Well, one alternative is to try to self-insure. So if you are in a situation where you could use a Health Savings Account, if you have a high-deductible health insurance plan, if you can max that out and build up, perhaps trade out the amount you would pay for a long-term care policy, invest that money instead to a Health Savings Account. You could perhaps build up quite a reserve that you could use for a potential long-term care. And if you don't need that money, you could use it for other purposes. So that would be one option. A reverse mortgage is another option.
And then I just encourage people to try to make your cost of living as low as possible. So pay off your mortgage by the time you hit retirement, carry no other debt into your later years. Try to keep those costs of living manageable.
Rob West: Very good. Well, we're so thankful for our friends, you and Mark and Joseph and the team at Sound Mind Investing. This was an excellent article, folks. I would encourage you to head over to soundmindinvesting.org. Check it out, "Long-Term Care How Would You Cover The Cost?" — and it's right there on the homepage and it's great reading. Matt, we appreciate you taking some time to be with us today.
Steve Moore: And would you come back and join us again because we have more questions? Matt, we'd love to have you back.
Matt Bell: I'd love to do that and really appreciate the opportunity.