Affordable Strategies for Extended Care Funding

There's a gap in the knowledge of many financial advisors, and their clients, when it comes to planning for the consequences of needing extended care.

You can avoid that gap by helping clients understand the financial implications, and by informing them that there may be insurance solutions that are more affordable and more accessible than they think.

Why own insurance?

Costs of extended care are high, with national median costs ranging from $20,000 annually for adult daycare, to over $100,000 annually for nursing home expenses.

Even costs at the lower range can significantly disrupt family finances if there is no insurance.

Low-income families have Medicaid to help with access to extended care services, as insurance solutions are likely unaffordable.

Wealthier individuals have a broad range of insurance solutions available to help mitigate the financial risks associated with extended care.

They are often only shown the "high-end" solutions, which they may deem too expensive for what they are willing to pay.

When it comes to insurance, a wealthier client's budget is not based on what they have available to spend; it's based on what they are willing to spend. Many comprehensive plans exceed that willingness.

Modest or middle-income families are more challenged because their income and assets may be too high to make Medicaid a viable alternative; yet, perhaps not high enough to make owning traditional long-term care insurance an affordable option.

How much insurance is meaningful?

Financial advisors have historically focused on higher-benefit insurance plans, meaning both the premiums and the buyer's incomes were higher.

Sure, when we need to use insurance, more benefits are always appreciated, but striving to own more benefits can make the insurance cost more than we are willing to spend.

This 'all or nothing' mindset keeps too many people from owning important protection that will have a positive impact on their families, and on their care.

Some wealthier clients may be interested in a hedging strategy where a smaller policy can buy the family time to prepare for future self-funding needs.

This avoids the need to immediately adjust spending, as well as reduces the need for an immediate "fire sale" of an asset to generate funds to pay for care.

Consider that nearly half of Americans will use paid long-term care services for less than one year.

This means owning insurance protection of $20,000, $50,000 or $100,000 may be more than adequate to help reduce financial stress and an immediate cash flow disruption.

As a result, there has been a trend toward lower-cost, lower-benefit insurance plans to help pay for extended care costs for up to one year.

The advantage of offering smaller benefit amounts can be seen in many employer-sponsored long-term care insurance program.

Such programs often see employees choosing maximum benefit amounts between $20,000 and $100,000.

There is an increasing realization that owning protection covering say, six months to one year of paid care, allows families to avoid a financial crisis — a crisis that comes at a time when they are also emotionally addressing the declining health of a loved one.

And even if the benefits of a short-term care plan are exhausted, owning some protection can provide families of all incomes with time to prepare for longer-term funding needs.

Obstacles remain.

Don't know/don't want to know: One in three individuals over the age of 40 incorrectly believes Medicare will cover custodial care needs and long-term care.

This lack of education often means they do not confront this planning until it confronts them when a loved one needs care.

And regardless of income, people tend to avoid this planning conversation.

They don't want to think about their health declining or becoming dependent on others for their daily care.

Many have ill-conceived notions about the full consequences and likelihood they will need care.

Advice: It is a responsibility of financial advisors to help their clients understand what a care event looks like for them.

How much of their income will need to be diverted to pay for care? Which assets can be earmarked for liquidation? What are the implications of those assets no longer being available for future income needs? What strategies, including insurance, can help address mitigate the financial consequences?

Can't get: Awareness of the need to plan may increase as we get older as the impact of aging begins to turn from concept to reality.

The problem is that the older we are, the more difficult it becomes to own insurance protection.

Ultimately, it may not be your budget that limits your options: It may be your health.

Advice: Short-term care plans typically include simplified eligibility requirements.

This means significantly higher application acceptance rates, even when someone is not of optimal health.

The result is people in their 60s, 70s, and 80s may still be able to own meaningful insurance protection.

Missed opportunities for newly Medicare eligibles: The advice given to those approaching age 65 tends to focus on "Medicare advice," discussing programs such as Medicare Advantage, Medicare supplement, and a Medicare prescription drug plan.

What gets overlooked is this may be their last opportunity to fully plan for their health care needs in retirement.

Insurance solutions may be too expensive or inaccessible due to their health if they put off planning even one more year.

Thus, such advice should not be framed as "Medicare" advice, but as "health care in retirement" advice.

According to a recent Kaiser Family Foundation Survey, the average couple pays close to $6,400 per year for a preferred provider organization (PPO) health plan.

With the transition to a zero-premium Medicare Advantage plan, a couple would pay a Medicare Part B premium of about $4,000 per year.

According to Chris Bodily, vice president of carrier relations at Willis Towers Watson, an insurance marketplace for retirees, "This leaves a monthly difference close to $2,400 which when used smartly can be repurposed to build a comprehensive insurance bundle of end-of-life protections including assistance while aging at home and a final cash benefit to ensure no debts are left for posterity."

Advice: Imagine advising your newly Medicare-eligible clients that for a cost similar to what they have been paying for health insurance, they may be able to own insurance for medical, prescription, dental, vision, and extended care for about what they were paying for health insurance.

Remove the Blind Spot

Traditional long-term care or hybrid Life/LTC insurance are still great options for those who want, can afford, and can qualify for greater benefit amounts.

For others, a short-term care option is easier to qualify for, can fit into more budgets, and still provides meaningful benefits at a time of crisis for families.

Now is the time to remove this blind spot and offer more affordable and accessible coverage options to your clients.

Thomas Beauregard Tom Beauregard is the founder and CEO of HCG Secure, a Goshen, Connecticut-based company focused on designing extended care programs for middle-income families. Before founding HCG Secure, he spent 15 years at UnitedHealth Group, most recently as the chief innovation officer.