How to Plan and Pay for Long-Term Care

Christine Benz: Hi, I'm Christine Benz. I'm here at the Morningstar Investment Conference. I'm thrilled to be joined today by Carolyn McClanahan. She is cofounder of Whealthcare Planning, and she is also an M.D. So, she is uniquely situated to discuss how people can think about the role of long-term care in their financial plans.

Carolyn, thank you so much for being here.

Carolyn McClanahan: It's a pleasure to be here. Thank you for having me.

Benz: Carolyn, let's talk about long-term care expenses starting with the costs. They can be ruinous, obviously, but let's talk about the swing factors that affect long-term care costs, and also the likelihood that someone may have to pay out of pocket for long-term care.

McClanahan: Long-term care costs have two components actually, the direct component of, say, a nursing home, assisted living, the living situation. But there is a bigger indirect component and that's the unpaid caregiving, the people who come in and have to give up their jobs to help you, your family members or those little niceties that long-term care insurance doesn't cover. And that cost is enormous. We spend over $500 billion a year in unpaid caregiving in this country. It's huge.

Benz: And a lot of that care is provided by family members. In fact, I think much of the long-term care in this country is provided by these unpaid caregivers that you're talking about.

McClanahan: Yeah, exactly. And most people, they didn't intend on becoming caregivers. More than 50% of caregivers would prefer not to be the caregiver for their family. It's huge numbers.

Benz: But it's the only option in many cases.

McClanahan: Only option, yeah.

Benz: So, let's talk about how people should approach this issue. Say, they want to get ahead of this long-term care issue. Let's take it one by one. The sort of purest protection against paid long-term care is to purchase some sort of an insurance policy. Let's talk about, kind of, what's been going on in that marketplace. It's not been great for consumers.

McClanahan: The long-term care insurance market has--it's gone crazy, because the costs have gone so high and so many people need care. And so, now the traditional long-term care policies are hugely expensive, and people don't want to buy them. They don't want--it's like you are going to pay into this 20, 30 years. Is the company still going to be around? Are the costs going to continue to go up, which they have astronomically. There are hybrid policies that people can buy that are a combination of either long-term care life insurance or long-term care and an annuity.

Benz: Do you like those products?

McClanahan: I still--they are still not much better than buying bonds really. It depends on when you use them whether they end up being a good deal. And so, the better thing for people to actually do is to plan for the actual cost of long-term care. This is where for years I've realized that most of long-term care needs are reactive. So, all of a sudden, mom falls, breaks her hip, and it starts this decline and this issue around caregiving. And so, what we actually do is help people plan for the logistics of aging of When are you going to move to a safer situation? When are you going to quit driving, which is actually a long-term care issue. And who is going to help with those healthcare decisions? Too many people don't talk about when they want to actually die and what situations are going to occur. So, families incur a lot of expenses doing unnecessary care and providing things that don't add to the quality of life and just make the cost become even more exorbitant. So, thinking through these and putting a plan in place long before there's trouble can greatly reduce the costs of long-term care.

Benz: And that's something that your firm focuses on, is thinking about and troubleshooting some of these long-term care costs.

McClanahan: Yes.

Benz: So, one question I often get is, How much do I need to have in assets if my plan is to cover these costs out of pocket? I don't have a long-term care insurance policy. How much do I need to set aside? To me, that seems like the wrong question, but I want to get your perspective on that issue.

McClanahan: It's multi-factorial. And so, you have to look at what is your health. If you have poor health, your chance of needing long-term care for a long time is not real high.

Benz: It's counterintuitive in a way.

McClanahan: Yeah, exactly. And if you are very healthy, you could have long-term care costs for a very long time. And then, where do you plan on aging? So, I call this the "blue toenail syndrome." The people who say I want to live in my home until I die no matter what. Well, if you get dementia and they say, "You have to drag me out by my cold blue toenails," right. And so if you have that and you get dementia, the cost can be astronomical. Twenty-four-hour care in some areas can be $300,000 a year. So planning out those logistics, of where is it are you going to age, and if people agree they are willing to move to assisted living and skilled care at a much sooner (place), it actually could be less expensive. So planning through the logistics of where you are going to live, what is your health, and who is around to help you. People who have nobody to help them, the costs are going to be a lot higher than people who have extended family where everybody is willing to pitch in.

Benz: So we've ticked off the major ways of paying for long-term care in terms of the peer insurance policies, the hybrid policies, self-funding. Let's talk about the last one the major funder of long-term care expenses in the U.S., that's Medicaid. So some people might say well I'll just exhaust my resources and fall back on Medicaid. What should people think through before they think of that as their plan?

McClanahan: Well first off, How much is the government willing to give up to long-term care funding? There are policies that the current presidential candidates are promoting to help pay for long-term care. Will that happen, we don't really know. And so what is the funding that's going to be available, and nursing homes--they don't want to take Medicaid. So if you come in straight off the bat and need Medicaid, it's going to be hard to get the place you want. What we advise people is to save at least enough money for couple of years of care, because if you can pay your way in, they are willing to take you and is less likely they'll kick you out at the back end. Most people really only need two to three years of long-term care, and so if you happen to exhaust that, that's when you can go to Medicaid.

Benz: Carolyn such an important topic. I am so appreciative of you being here today.

McClanahan: Thank you for having me.

Benz: Thanks for watching. I'm Christine Benz from Morningstar.com.