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For
one, long-term care is expensive. In 2012, the average annual cost for a
nursing home was $81,030, and the average hourly rate for home health
care was $21. Yet only about 13 percent of the population buys long-term
care insurance, which could help defray these costs. In theory, if
consumers were rational planners, they'd buy insurance to mitigate the
risk of running through their retirement savings on care.
Long-term
care is defined as assistance with the basic activities of daily
living, such as dressing, eating, taking medications, showering and
using the bathroom. So it isn't medical care. As a result, neither
medical insurance policies nor Medicare pay for most long-term care
expenses, although Medicare will pay
for up to 100 days in a skilled nursing facility (SNF) following a
hospital stay and some medical insurance policies cover a minimal amount
of assistance.
Medicaid, on
the other hand, is a program operated by the states that pays for
long-term care for indigent citizens; it usually requires that an
individual first draw down most of their financial assets in order to be
eligible. The availability of Medicaid has been cited as one reason why
people don't buy long-term care insurance.
The
CRR study calculated a "willingness to pay" ratio that analyzed the
percent of the population who could expect to benefit from a long-term
care insurance policy to cover costs that aren't paid by Medicare or
Medicaid. The CRR study took into account:
- The likelihood of ever needing nursing home care in a lifetime, estimated by the CRR as 44 percent of men and 58 percent of women who had attained aged 65.
- The duration of such care, estimated by the CRR as averaging 0.88 of a year for men and 1.37 of a year for women.
Using
the CRR's methodology, 19 percent of men and 31 percent of women had a
positive "willingness to pay" ratio. These ratios are higher than the 13
percent of the population that buys long-term care insurance, so
there's still a significant coverage gap.
So
what's the bottom line for you? Consider the possibility that you could
one day face potentially ruinous long-term care expenses.
Notably,
the people most vulnerable to this threat have substantial retirement
savings, since they won't be eligible for Medicaid until their savings
are exhausted. Women are particularly in danger, since wives tend to
outlive husbands (This is illustrated by the fact that the CRR's
willingness-to-pay ratio is much higher for women than for men.)
Everybody should have a strategy to address the threat of long-term care expenses, which can include some combination of the following:- Hold home equity in reserve as a source that can be tapped in case long-term care is needed (which might argue against using a reserve mortgage to generate retirement income).
- Maintain a substantial investment reserve that isn't tapped to generate retirement income, or only use interest and dividends for retirement income and hold the principal in reserve for long-term care costs.
- Be aware of lower-cost alternatives to a nursing home, such as a residential care facility for the elderly.
- Be vigilant about taking care of your health to reduce the odds of eventually needing care.
- Move close to family who could potentially take care of you, but make sure they're willing and able to provide this care.
With
respect to this latter point, be careful! The need to provide care for
elderly parents often derails the career and retirement plans of older
workers, most often women, who typically reduce their hours or quit
their jobs to care for an elderly relative.
Studies like the CRR analysis look for logical reasons why people should or shouldn't buy long-term care insurance.
Ultimately,
the most likely reason people aren't buying such insurance is that the
perceived threat of long-term care is so far in the future that it's a
lot easier to ignore it. People just hope that they won't need expensive
long-term care. But hope is not a strategy.
Culled from CBC money watch
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