Mellody Hobson: Preparing for Long-Term Care
Jan. 12, 2004 — -- Millions of Americans are finding themselves stuck in the difficult position of caring for an elderly parent while also trying to cover the costs of college education for children and saving for retirement. These individuals are commonly referred to as members of the "sandwich generation."
According to the MetLife Mature Market Institute study, nearly 25 percent of all households have at least one adult who has provided care for an elderly person in the last year. Interestingly, 33 percent of working women reduced their work hours to care for a chronically ill relative; 29 percent passed up job promotion training or an assignment; 16 percent quit their jobs; and 13 percent retired early. In fact, the survey revealed, caregivers helped with their elderly relative's expenses for two to six years, spending a total of $19,525 of their own money.
More than 78 million Americans will be over 65 by 2025. And with age often comes a need for dependent care and assistance. According to Medicare, 7 million people over the age of 65 required long-term care in 2004. This year, the number is expected to rise to 9 million, and by 2020, the number of people projected to need long-term care is 12 million.
The cost of this care is exorbitant. In fact, according to a survey by the institute, the average cost for a nursing home is $66,153 a year. With costs projected only to rise, here are some critical issues and possible solutions to consider:
Financing the cost of long term care:
1. Medicare/Medicaid:
The first line of defense for medical expenses for seniors is Medicare, which is health insurance coverage provided by the federal government to most people who are 65 years and older, as well as some younger people with disabilities or kidney failure. As it relates to long-term care, Medicare covers certain expenses including those associated with limited stays in nursing homes, home health agency care and hospice care. Although Medicare will not pay for stays in assisted-living facilities, it may cover the costs of some services -- including home health care and doctors' visits -- provided in these facilities.
That said, about 50 percent of people in nursing homes rely on personal wealth to pay for their long-term care, according to Medicare. An additional resource to keep in mind is Medicaid. Jointly funded by the federal and state governments, Medicaid provides health insurance to the poor as well as those who are 65 years and older, disabled or eligible for other government aid. Medicaid offers Medicare beneficiaries assistance with their out-of-pocket expenses and also covers the costs of prescription drugs, eyeglasses and hearing aids as well as other services not covered by Medicare. A key benefit of Medicaid is that nursing home benefits outlast those offered by Medicare which always end after the first 100 days in each benefit period.
2. Long-term care insurance:
One option to patch some of the holes in the safety net created by Medicare and Medicaid is a private insurance policy called long-term care insurance. Basically, long-term care insurance is coverage for nursing homes, assisted living centers, home health care and many services related to elderly assistance.
Additionally, long-term care insurance can cover any individual in case they are disabled and need individual care no matter their age. In cases where an elderly patient is too sick to take care of themselves and unable to afford nursing care, the individual's assets as well as those of their spouse must be completely maxed out before the government steps in to help. It is, however, not medical insurance.
Is it a good thing to have?
A long-term care insurance policy can protect your assets and those of your spouse in the case where you would otherwise be unable to afford care. According to bankrate.com, the average cost of long-term care insurance can range from $400 a year (for individuals in their 30s) to $1,000 for those in their 50s and 60s.
If you are young and healthy, long-term care insurance may not be the right solution for your eventual care costs. Instead, a young person would do much better investing the amount of the annual premium in the stock market and self-funding their care.
While there is no single rule of thumb to follow regarding coverage, take into account your family medical history, your net worth, age and marital status to determine if a long-term care policy is the right choice for your care concerns. United Seniors Health Cooperative recommends seniors have at least $75,000 in assets and an annual income of $30,000 a year before they purchase long-term care insurance.
What should you consider when choosing which long-term care insurance plan is best?
It is important to talk to an insurance agent who has a wide variety of long-term care options as this type of insurance is not a one-size-fits-all package. Key factors such as the dollar-per-day benefit, duration of coverage and whether or not the policy is inflation protected to ensure your daily allowance keeps pace with the dollar's real value need be taken into consideration.
Is this the complete coverage answer?
The typical long-term care insurance policy provides coverage of $50 to $200 a day for care, whereas a typical nursing home stay can range anywhere from $100 a day to $400 a day. As such, owning a long-term care policy does not mean you can stop saving for retirement. A quick run of the math reveals a gap between what you have and what you need. Additionally, many policies have a deductible which often is correlated to days and not dollars and may require you to cover the cost of a stay of 120 days or less out of your own pocket. Therefore, it is critical to understand the benefits and costs of a policy completely before purchasing one.
3. Dependent Care Account
Another option to defer costs for long-term care is a dependent care flexible spending account. A dependent care FSA allows you to defer a maximum of $5,000 in pre-tax income each year to cover certain expenses for eligible dependents, which include any dependent children under age 13 or any person living with you claimed as a dependent and who is physically or mentally incapable of self-care, such as an elderly parent.
Eligible expenses include the costs of adult day care (does not include overnight and nursing home facilities); day care and housekeeping services provided in your home for a qualifying dependent; day care provided outside of the home, preschool or summer day camp; and food supplied by a day care.
4. Have your house pay you
Not only are long-term health care costs increasing exponentially for seniors, but personal debt among the retired is growing rampantly as well. According to a report by SmartMoney, nearly one-third of seniors has $4,000 in credit card debt -- an 89 percent increase in the last 10 years. As such, one possibility for seniors with debt could be to take on a reverse mortgage.
Reverse mortgages let you tap into home equity and repay the loan with proceeds from the eventual sale of the property -- often at death. The greatest appeal of a reverse mortgage is that you can be guaranteed a source of monthly income for as long as you need it, even if you live beyond your life expectancy. Currently, about 13.2 million households could qualify for an average of $72,128 apiece in reverse-mortgage loans.
A reverse mortgage is a loan against your property that you do not have to pay back as long as you live in your home. The total of the loan must be paid back when the last surviving borrower dies, sells the home or permanently moves away. In most cases, in order to qualify for a reverse mortgage, you must be at least 62 years of age.
Key facts about reverse mortgages:
The home must be the primary residence for the borrower and generally, only single family, one-unit dwellings are eligible.
There are three major reverse mortgage providers in the United States: the Federal Housing Administration Home Equity Conversion Mortgage, which is a federally insured reverse mortgage; the Fannie Mae Home Keeper loan (and the Home Keeper for Home Purchase loan); and the Equity Guard Plan and the Cash Account Plan.
The costs associated with getting a reverse mortgage vary depending on the product you choose. However, costs typically include the origination fee (which can be financed through the reverse mortgage), an appraisal fee and charges similar to those associated with a regular mortgage.
The money provided through a reverse mortgage does not affect your regular Social Security or Medicare Benefits. However, it may affect your ability to be eligible for state and federal government assistance programs, such as Medicaid.
5. Delay your retirement
Dreams of playing nine holes or basking in the warm Florida sun should take a back seat to staying at your job if you are concerned about the costs of long-term care. Not only does the longer period of time equate to more earned dollars and more time for your investments to grow, but also to a higher value of benefits received.
For example, a 40-year-old who makes $40,000 a year and opts for Social Security at the earliest possible time (62 years and 1 month) would be entitled to $955 a month in benefits. However, if the same individual delays retirement another eight years, they would receive $1,751 in benefits -- a difference of almost $800 a month!
6. Take advantage of catch-up provisions
Americans over the age of 50 can take advantage of "catch-up provisions" for their retirement. Through 2005, individuals age 50 and older may contribute up to an additional $500 to their IRAs per year, increasing to $1,000 in 2006. This additional allocation can add up nicely and make for a larger nest egg for your retirement. For example, if an investor catches up with $500 more a year for 15 years (assuming an 8 percent annual return) they would have $15,000 more than an investor who did not take advantage of the catch-up provision.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is "Good Morning America's" personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.