Long Term Care Funding Crisis
By Paula Dorion-Gray, CFP®
Previously published by The Northwest Herald
In a speech to the National Press earlier this year, Federal Reserve Chairman Ben Bernacke stated that “the two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health care costs”. The three largest entitlement programs (Medicare, Medicaid and Social Security) are all creating problems for the federal and state budgets, just as baby boomers are racing into retirement at the rate of 10,000 per day!
The cost to Medicaid, the primary payer for long term care services, in 2011 will be in the neighborhood of $200 billion. The number of people on Medicaid has increased while the dollars available have decreased over the past three years. Unlike Social Security and Medicare, one does not automatically qualify for Medicaid. Qualifying for Medicaid is based on income and assets at the poverty level.
Ten years ago it appeared like long-term care insurance would be a major part of the solution to this problem. However, sales over that time period have actually declined. Furthermore, major life insurance companies like MetLife and The Guardian have left the market in 2010 and 2011 respectively while Genworth and John Hancock have increased their rates.
According to the American Association for Long-Term Care Insurance’s 2010 Sourcebook, a private room cost an average $220 per day ($80,300 annually) in 2009. Costs will vary based on your geographic location but obviously a nursing home stay can be financially devastating.
There are three ways to pay for the cost of long term care: 1) self insure which could require a significant amount of money; 2) purchase long-term care insurance or 3) spend down all your assets and then depend on Medicaid. The cost of Long-Term Care Insurance can be expensive and based on my experience can and likely will increase over time but like all insurance it is the least expensive way to cover the cost IF you can afford it.
Many people are willing to take their chances since they believe the statistics are in their favor that they will not need long term care. The percentage of people that are at risk of needing LTC at the age of 65 is 49%. Those probabilities are much higher than the risk of being in an auto accident (0.4 percent) or having damage in your home due to fire (0.08 percent) but we never consider having no coverage on our home or vehicles.
In late 2010, the National Conference of Insurance Legislators unanimously passed the Life Insurance Consumer Disclosure Model Law which requires that life insurance companies disclose to their policy owners options to use their life insurance policies to avoid a lapse or surrender. Among the options legally required to be disclosed to policy owners is their ability to convert a policy’s death benefit into a long-term care benefit plan.
Lawmakers understand that there are billions of dollars worth of life insurance in-force in the United States and a massive amount is abandoned every year. Those policies could be put to work to help pay for the costs of long-term care. To put in perspective the difference in products sold between long-term care and life insurance, in New York State there are 400,000 long term care policies in force compared to 9 million life insurance policies. If life insurance policies can be converted to be used to provide income for long term care needs, this would improve both the circumstances of the individual and the provider while reducing the taxpayers’ burden to cover these costs. While considering long term care, be sure to consider all your options. Always, ask your professional financial advisor for advice before acting.
Please send any financial questions you wish to have answered in this column to Dorion-Gray Retirement Planning, Inc., 2602 IL Route 176, Crystal Lake, IL 60014. You may also fax them to 815.455.4989 or email paula@doriongray.com.
Paula Dorion-Gray, CFP® is a Registered Representative of Securities America, Inc. Member FINRA/SIPC. Dorion Gray Retirement Planning is a trade name of Dorion-Gray Financial Services Inc., a SEC Registered Investment Advisory Firm. Dorion-Gray and Securities America, Inc. are not affiliated.
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