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Crafting a Plan for Long-Term Care

Tackling this topic is tricky for your September to-do list but necessary.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. For many of us, September is the time to buckle down after a relaxing summer. Morningstar's Christine Benz thinks it's as good a time as any to take a closer look at a difficult financial-planning problem, formulating a long-term-care plan. Christine is here today to discuss it with us.

Hey there, thank you for being here.

Christine Benz: Hi, Susan. It's great to see you.

Dziubinski: Let's start with a basic question. What is long-term care? And how likely are we really to need it?

Benz: Yeah, it's an amorphous term, it describes healthcare and other types of care that are provided to individuals. It's often custodial care, care that helps someone with their activities of daily living, so things like showering, getting meals, and so forth. And this type of care is not typically covered by Medicare or your traditional healthcare plan. So it's typically an out-of-pocket set of costs if you do require long-term care.

Dziubinski: You know, this isn't necessarily a happy subject to think about. It's clear why so many people really don't pay attention to this or tend to skip over it during the financial-planning process. But ignoring it obviously isn't a good response. Where should people really start to think about this?

Benz: The starting point is thinking about where you fall on the spectrum of paying for long-term care. People with very little in assets will typically require Medicaid to pay their long-term-care bills. And there's certainly no shame in that--in fact, Medicaid is the largest payer of long-term care in the U.S. today. So people without a lot of assets will likely be reliant on Medicaid. At the other extreme, people with significant amounts of wealth, probably a lot of our viewers who have significant financial assets, will be able to pay long-term-care costs out of pocket, so they'd be the self-funders. And then in the middle would be people for whom some type of an insurance product might be appropriate. 

There are two types of insurance products. One is a pure long-term-care insurance product, and the other is what are called hybrid products. And those would be suitable for people who are nervous about their financial assets lasting throughout their retirement years and having enough left over to pay for long-term care.

Dziubinski: Let's talk a little bit more about those people who can self-fund. What are the steps that they should be taking?

Benz: Well, I think the key is to think about right-sizing a long-term-care fund. And, to me, I think you can use the data about long-term-care usage to inform how much to set aside for long-term care. So we know that the typical length of long-term-care need is about 2, 2.5 years; the average cost, which Genworth keeps track of, is about $100,000 per year. Although there's a huge level of variation in that cost of care, and it's very geography dependent. So if you live in a big urban center, you will probably pay more than $100,000 a year. If you are in a more rural area, it'll probably come more cheaply. So think about duration of care to inform how much to set aside. And then I think it pays to take that next step and segregate your long-term-care fund from the rest of your investment assets, from the rest of your spendable assets. And the way I think about it is that you're building this fund for long-term care, but if you end up not needing it, maybe you have a lot of longevity, maybe you end up living to be over 100. Well, then that fund could provide you with the funds that you need for the later costs in your life. Alternatively, you could leave the money for children or grandchildren if you end up not using it for long-term care or having a lot of longevity. So there's some flexibility with this strategy, which I think is attractive.

Dziubinski: And then what about people who, maybe their plans are a little bit tighter, so they would want to consider pursuing some form of long-term-care insurance? What are the considerations there, things to keep in mind?

Benz:
Right. So there are pure long-term-care insurance policies. A dwindling number of insurers are offering these policies, in part because their claims experience has been terrible. They found out that if people have this type of insurance, they tend to use it. And they've also been beholden to this very low interest-rate environment. So many of these firms have been prompted to increase their premiums over the years; consumers have had kind of a bad experience, many consumers have. And that's why we've increasingly seen some of these hybrid long-term-care insurance products come online. And so this is typically a life insurance policy with a long-term-care insurance rider bolted on. There is an additional product type that is an annuity with a long-term-care product. These products are more complex, certainly, but they do feature an attractive degree of optionality, so many consumers are worried about putting their premiums toward a long-term-care insurance policy, a pure policy, that they never need. These products, the hybrid products, protect you against a range of outcomes, and from that standpoint, they can seem pretty attractive. Another feature is that you can do what's called a 1035 exchange into a hybrid product from a life insurance product. And so that is something to consider for people who have life insurance that they don't necessarily need anymore.

Dziubinski:
And, Christine, what about for people who don't have sufficient assets to either self-fund or to pursue some sort of insurance option? What should they be bearing in mind?

Benz: Well, I think the key thing to be bearing in mind in that instance is that you may not have a lot of choice in terms of where you receive long-term care, that if you are using Medicaid to fund your long-term care, using state resources to fund your long-term care, you will not have a lot of latitude to choose where you receive care. And receiving care in-home, which many people seem to prefer, is typically not an option with Medicaid-provided care. That's a key consideration. And then another key thing to bear in mind for married couples is that you need to exhaust most of your resources to qualify for Medicaid-provided care. And that can effectively impoverish the well spouse or leave him or her with insufficient assets to live on. So that's another key consideration, in that case--it's not an easy fallback. It's a fallback for many, but there are certainly trade-offs.

Dziubinski: And then finally, you think it's important to think through some of the nonfinancial aspects of long-term care? What should people be thinking about there?

Benz: Absolutely. So a key one is the type of setting in which you might choose to receive long-term care. As I mentioned, Susan, most people would prefer to receive care in their home. They'd like to stay in their homes and have care come to them if need be. And that's particularly true as we've come through this COVID period. And we've seen such devastation in institutionalized settings due to the COVID crisis, the COVID pandemic. And then another thing to think through is just the impact of long-term care on those around you. We know that family members tend to be key providers of long-term care on a sort of informal basis. But there are costs to be borne by people providing that care in terms of their own health, in terms of their own quality of life. And there's also been some research about the impact of these informal caregivers, the impact that they felt in terms of their careers--that many people who are informal caregivers are also shouldering paid work elsewhere. So really thinking through the implications for your family, for your extended network, if in fact, you require long-term care, I think that's an important set of considerations.

Dziubinski: Well, Christine, thank you so much for joining us today. It's a difficult topic to discuss, but one that's very important. Thank you.

Benz:
Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.

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