The U.S. Department of Health and Human Services estimates that 70% of people over age 65 may need extended care services at some point in their lives. But what is extended care and how can you and your family prepare for the financial—and non-financial—contingencies in the event care is needed?
When we hear the term “extended care,” many of us may automatically think of round the clock care in a skilled nursing facility. And that thought may give us anxiety about the potential cost that this level of care entails, especially for an extended period of time. But in reality, extended care refers to a variety of medical and non–medical services needed by those who have a chronic illness or disability, most commonly associated with aging, and can include everything from assistance with activities of daily living – help with dressing, bathing, using the bathroom, or even driving to the store – to more intensive therapeutic and medical care requiring the services of skilled medical personnel. Extended care may be provided at home, at a community center, in an assisted living facility, or in a skilled nursing home.
While it is true that the cost for skilled nursing care is very high, the vast majority of retirees who need extended care won’t need that level of care. A Morningstar study from 2019 revealed that 63% of those who turned age 65 in 2019 would not experience out of pocket costs for extended care during their lifetime. This suggests the majority of extended care is provided at home by family and friends. On the other end of the spectrum, the Morningstar study shows that 9% of retirees may experience costs of more than $250,000 in their lifetimes, as some will require more intensive care provided by skilled professionals.
So how does one prepare for a potential extended care contingency? The research suggests that the majority of us aren’t likely to require skilled care, so do we have family members and friends that would be capable and willing to assist with activities of daily living? Is our home suitable for aging in place or do we need to prepare for different accommodations (remodeling or moving to a more suitable place or possibly a continuum care facility)? Current health status and family medical history (including history of Alzheimer’s and dementia) are important factors to consider as well.
The two primary alternatives for covering the financial cost of extended care are to self-insure or purchase extended care insurance. Self-insuring may be feasible depending on resources available including Social Security and pensions (or other sources of guaranteed income) and personal and retirement savings. Another critical component is your spending habits and whether you’re likely to leave a large estate or spend the majority of assets during your lifetime. Fortunately, the tax code is currently structured to provide some relief to those requiring extended care, as out of pocket long-term care costs that exceed 7.5% of adjusted gross income are deductible as medical expenses.
As we already know, the primary purpose of insurance is to safeguard against a catastrophic financial loss. Therefore, extended care insurance could be considered by those who cannot afford to assume the risk of a long-term care contingency. Unfortunately, traditional extended care insurance policies have become extraordinarily expensive over the years, which has priced-out many of those who may need the coverage the most. A more cost-effective strategy that is gaining popularity is to add an extended care rider to an existing life insurance policy or annuity, if the death benefit is no longer needed for financial dependents of the insured.
A well-rounded financial plan should include an evaluation of potential extended care needs but will likely require input from other professionals as well including your healthcare providers, accountant and estate planning attorney. But in addition to relieving stress on family and caregivers if care is required, taking the time to plan for an extended care contingency can help us to protect our assets, preserve dignity and maintain independence.
- S. Department of Health and Human Services, 2020
- Morningstar: Must-Know Statistics About Long-Term Care: 2019 Edition
- Morningstar: How to Create a Long-Term Care Plan
- FMG Suite: Understanding Extended Care
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