In May 2005, a U.S. House of Representatives Energy and Commerce subcommittee on health concluded that the rising cost of long-term health care, coupled with the impending surge of Baby Boomer retirees, could cripple the country financially unless changes are made.Testifying before the subcommittee, Dr. Judy Feder, dean of public policy at Georgetown University, stated that in the years ahead, just 30 percent of post-65-year-olds will die without needing long-term care. Twenty percent of that age group will require more than five years of care.
Long-term care can be defined as continuous, skilled nursing care, as well as custodial care to assist with daily living activities. Long-term care can last for a few months, a year, several years, or indefinitely.
The American Institute of CPAs estimated $50,000 as the national average annual cost for long-term care. Geography also plays a part in the cost, as there are significant differences in care costs across the country.
According to a 2003 survey conducted by GE Financial's Long-Term Care Insurance Division, annual long-term care costs in New York City averaged $105,500, compared to $80,100 across the Hudson River in New Jersey, and $45,800 in Tennessee. The most expensive place in the country for long-term care is Alaska, averaging $166,700 per year in the GE survey. The least expensive care can be found in Louisiana, averaging $35,900 per year.
But those figures are in today's dollars. By 2020, the cost of care is expected to double.
The cost of care is expected to increase in large part due to the anticipated shortage of caregivers, combined with the aging of the post World-War II generation.
"People don't understand the caregiver shortage implications," said Alfred Clapp Jr., president of New York-based Financial Strategies & Services Corp. and a nationally known speaker and writer who regularly informs his audiences about long-term care insurance.
"The caregiver population is not really going to grow very much, but the population of the seniors is doubling, and quadrupling if you're over age 80," said Clapp.
Medicaid not an option
The largest source of long-term health care in the country today is care given by family and friends, and the second largest provider is the combined state and federal Medicaid program. Medicaid is often thought of as the likely last-resort payer for long-term care, but the program cannot handle the anticipated costs of the Baby Boom generation as that group heads for retirement. If we are to believe the statistics, at a minimum, 40 percent of the Baby Boomers will relocate, at least temporarily, into nursing homes.
Medicaid was designed as a last-resort welfare program for low-income people who can't afford to provide their own medical care, not an across-the-board social insurance program for all citizens.
In order to qualify for Medicaid, the patient must first deplete personal assets. For many, this is an unpopular scenario on which providers of long-term care insurance hope to capitalize.
Because Medicaid recipients are required to spend down their personal savings in order to qualify for the program, recipients with modest assets are left with nothing. Those with significant assets are reluctant to spend every last dollar, and find Medicaid an unsuitable alternative.
Candidates for LTCI
Analysts seem to agree that the best candidate for long-term care insurance is a person in their late 40s to 50s who has, or expects to have, measurable but not necessarily excessive wealth.
"In your 40s, premiums are cheaper, and typically people tend to be healthy at that age," explained Bruce Cain, sales manager at Overdorf Insurance, in Anderson, Ind. "As you get older and have more health problems, you can run into increased premiums because you can't qualify for a preferred rate."
"The people who might need [LTCI] are those who have accumulated a few hundred thousand dollars of assets in their lifetimes, and the care costs of the first spouse that needs care might impoverish the second spouse," said Mitchell Freedman, CPA, PFS and president of MFAC Financial Advisors Inc. "If they don't have a lot of assets, Medicaid will take care of them. If they have a lot of assets, more than $1 million, and they aren't overly concerned about what they're going to be leaving to their heirs, they probably don't need it."
"Most of the time, individuals age 55 and above are the ones really starting to think about it," continued Freedman. "The primary motivation is they're dealing with the cost of long-term care for their parents. Once people get to their 70s, the [insurance] costs are generally prohibitive."
The role of accountants
The need for personal long-term care insurance often focuses on asset protection. "Even though that's probably not really the main reason you should buy it, that sort of pushes people's button," said Cain.
"The cost of long-term care can be enough to devastate a portfolio or a retirement account to the point where the spouse could spend their life in poverty," explained Michael Crifasi, CFP, of CEI Financial Planning Inc., in Atlanta. "A second problem is the possibility of a parent or a child going into long-term care and basically destroying your life."
"Frequently, I recommend to my clients if their parent can't afford long-term care insurance, they help their parent pay for it," said Crifasi. The reverse works as well. "A number of my wealthier clients buy policies for their children."
Freedman suggested that accountants should be aware of LTCI in anyone's insurance portfolio. "As trusted advisors to their clients, they need to determine what their clients' needs are, and alert clients to the fact that as they age, they are going to be contacted by sellers of these products," he said. "People should use their CPA as a resource to analyze what would be the best policy, premiums and company to select these benefits from."
Crifasi mentioned the importance of tax advice when it comes to making decisions about LTCI. Not only do corporations have the ability to deduct long-term care premiums, but long-term care insurance planning is also an estate issue. "It's estate protection in the event that you go into long-term care," he said. "What you are protecting is not only your spouse, but your heirs also."
Today's federal tax laws permit a limited deduction for LTCI premiums as a medical expense deduction. The amount of the premium that can be deducted increases as the taxpayer ages. Legislation has been kicking around in Congress for a few years to add an above-the-line deduction for LTCI on individual federal income tax returns, but momentum on this issue is not strong. Many states allow a deduction or credit for part or all of LTCI premiums.
CPAs need to take a long-term view when advising clients about LTCI options, according to Financial Strategies' Clapp. "That's not the CPA world. The CPA thinks, 'I've closed the books now. I don't want to project.' That doesn't solve the magnitude of the aging world."
"There's tremendous confusion between custodial and hospital care," said Clapp. "It really is much more. All of a sudden you've got a long-term care at the tail end of your life, and potentially multi-thousands of dollars, a hundred thousand or more. There's a tremendous misunderstanding that, as important as our health hospitalization and medications are, those could be miniscule compared to long-term care."
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