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Hurricane Warning

Hurricane Warning This is a National Weather Service Bulletin from the Storm Center - Correction, this is a National Financial Service Bulletin from yours truly: There is a financial hurricane brewing that could have a devastating impact on many of us individually and all of us collectively. There is a name for this hurricane and it is -Long Term Care (LTC).

Despite the fact that we, as Americans, are growing older, many of us are still unaware of the risks associated with living a long life and are misinformed as to what LTC is not, what it is, who or what pays for it and what costs are covered.

What Long Term Care is Not
Unlike most health services, long term care is not generally designed to treat an illness or a condition in a hospital or a doctor's office. It is not the type of care that one might receive when recuperating or rehabilitating from sickness or an injury. Also, contrary to popular belief, the vast majority of long term care is NOT administered in a nursing home.

What Long Term Care Is
With the advances made in medicine and medical technology and the progress made in the treatment of disease, we are living longer. Long term care deals with conditions that are chronic (lasting three months or more) as opposed to conditions that are acute (short in duration, rapidly progressive and in need of urgent care). It is care-oriented rather than cure-oriented. For example, it is the continuum of care for physical ailments such as stroke, arthritis, osteoporosis and cognitive impairments such as Parkinson's disease, Alzheimer's disease and dementia. In other words, as life expectancy increases there are corresponding risks for diminished abilities to live without assistance. Often labeled as custodial care, this type of care can take place in settings such as assisted living facilities, nursing homes, or at home - where care is oftentimes provided by unpaid family members. As a matter of fact, families most often do provide the majority of care. So the question is not, "Who will take care of those in need?" but rather, "What will providing that care do to the family and their finances?"

Sandwich Generation
The burden on family caregivers (usually daughters - 72% of family caregivers are women1) of juggling their own careers and raising their own family is likely to grow. Many give up their jobs, plan their lives around an ill parent or become emotionally and physically sick over a parent's declining health.

In a sample of employed adults, 35% of workers, men and women alike, say they have provided care for a relative or in-law 65 or older in the past year.2 This problem could likely have a negative impact on job performance. Such things as increased employee stress, increased time off and increased interruptions to handle family affairs could come into play.

Who or What Covers the Cost
Paying for extended care is one of the great social concerns facing the elderly and their children. Medicare, the primary health care program for retirees, pays for skilled (continuously medically necessary) or rehabilitative care, but not custodial care in any venue. Medicaid, a Federal and State program for financially needy individuals, will pay for custodial care, but primarily in nursing homes where only 11% of those needing care actually receive it.3 Funding for home care and assisted living is very limited based on the availability of funds. Veterans believe that the VA will pay for home care, adult day care or assisted living. However, as with Medicaid, VA funding is very limited and generally based on a service-related disability.4 The result is that most consumers are forced to pay privately for their care. The current costs for LTC in Massachusetts are:

Home Health Aide: $22.50 per hour5
Assisted Living Facility: $1,740 - $10,000 per month6
Nursing Home (Semi-private room): $95,995 per year7

The Hurricane
As the baby boom generation ages, the need for long term care services is likely to increase. This will certainly have an impact on Medicare, Medicaid and personal retirement portfolios and personal finances in general. The Comptroller General in his March 2002 report says,"...absent substantial reform of entitlement programs a rapid escalation of federal spending for Social Security, Medicare and Medicaid beginning in less than 10 years from now is virtually certain to overwhelm the rest of the federal budget."8 He goes on to say that, under current assumptions, "...spending for net interest, Social Security, Medicare and Medicaid would consume nearly three quarters of the federal revenue by 2030. This will leave little room for other federal priorities including defense and education."9

Gale Force Winds
In addition to the aging baby boomer generation, the Centers for Medicare and Medicaid Services- February 2005 report indicates that LTC costs are projected to almost double in 10 years.10 Furthermore, Medicare solvency is also threatened by a declining percentage of workers supporting each beneficiary (3.4 per beneficiary now and an estimated 2.0 in 2040)11.

Something's Got to Give
Dollars are dwindling for both Medicare and Medicaid with the aging population. As previously mentioned, this will be compounded by the influx of baby boomers into the system. The Health Insurance Portability and Accountability Act of 1997 (HIPAA) sends a clear message to take care of your long term care needs with private insurance because there isn't enough money to create a new program for everyone. In recognition of this problem the Federal government in 2001 made available the Federal Long Term Care Insurance Program to all current and retired federal government employees and their families to include military personnel.

The Role of Long Term Care Insurance
Given the aforementioned backdrop, it is no wonder that Long Term Care Insurance (LTCi) is more and more becoming an important part of financial planning. The product has two roles: (1) helping to keep families together and (2) allowing for personal finances and retirement portfolios to execute for their intended purposes.

From a family perspective, long term care insurance doesn't replace the need for family involvement in providing care but rather builds on it. It pays professionals to assist the family with those tasks that can be difficult, time consuming, and often embarrassing. This, in turn, allows the family to provide care better and longer at home.

Indeed, many employers are offering LTCi as a way of enhancing employee benefits, attracting and rewarding key employees while taking advantage of potential tax benefits. Although a secure financial future for employees is important, many individuals want to ensure that the potential consequences of living a long life are addressed in a way that won't deplete their life savings and retirement portfolios. LTCi can protect the employee and the business owner's personal assets.

Federal Tax Incentives
The tax incentives introduced by HIPAA are significant to the extent that tax-qualified LTCi policies offer tax-deductibility of premiums (in most situations) and tax-free benefits.12 What is of greater significance is that certain types of employers have incentive to offer LTCi policies to employees and their spouses because employer contributions are fully tax-deductible and, as aforementioned, benefits to employees are tax-free.

Plan Like Noah
Just as Noah did not build the Ark when it was raining, planning for the tremendous destructive potential of LTC after the hurricane hits is too late. The future costs of long term care are very likely to place significant pressure on the Federal government and also poke a hole in family financial plans if they don't sink them completely. Lack of awareness and understanding has the potential for crisis planning, which could have catastrophic financial, psychological and emotional consequences.

What to Do
Living a long life is a near certainty. Planning for it is now a necessity. Here are my suggestions:
  • Be aware of the fact that the major concern is not, "What are the chances that the need for LTC will occur?" but rather, "What will the financial, psychological and emotional impact of providing this care have on the family?"
  • Know what long term care is not and know what it is
  • Be better informed about the costs of LTC, who or what pays for LTC and the limits and restrictions of public assistance (Medicare and Medicaid)
  • Have a plan
  • Seriously consider weaving LTCi into your financial plan
  • Seek professional assistance from a competent, credentialed, trusted advisor
Batten down the hatches - the winds are not dying down.

Disclaimer: Federal and State laws in this area are complex and subject to change. I do not render tax or legal advice. Please consult with your advisors regarding applicable tax or legal considerations.

1 "Caregiving in the U.S.," National Alliance for Giving and the American Association of Retired Persons, 1997.
2 The National Study of the Changing Workforce, Families & Work Institute, 2002.
3 "A Profile of Older Americans," US Administration on Aging & AARP, 2002.
4 VA Long-Term Care: Veteran's Access to Non Institutional Care is Limited by Service Gaps and Facility Restrictions, GAO-03-815T, Washington, D.C., 22 May. 2003.
5 The MetLife Market Survey of Nursing Home & Home Care Costs, September 2003.
6 Assisted Living in Massachusetts, 2003 Resource Guide.
7 The MetLife Market Survey of Nursing Home & Home Care Costs, September 2003.
8 Walker, David M., US Comptroller General, "Long Term Care: Aging Baby Boom Generation will Increase Demand and Burden Federal & State Budgets." General Accounting Office, GAO-02-544T, 21 Mar.2002, 1.
9 Walker 7.
10 . Heffler et al., "U.S. Health Spending Projections for 2004 - 2014," Health Affairs, 25 Feb. 2005, http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.74/DC1 (2 May 2005).
11 "Income of the Population 55 or Older, 2000," Social Security Online, Feb. 2002. http://www.ssa.gov/policy/docs/statcomps/income_pop55/2000/ (2 May 2005).
12 America's Health Insurance Plans, Long-Term Care Insurance, 2004.



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