Financial Planning for Long-Term Care

Although the numbers are different, the process of financial planning for long-term care is essentially the same as other financial planning for retirement and older age. At base, financial planning is an exercise (or series of exercises) that compares known and estimated information about various expenses with estimates of the financial resources that are available or expected to be available to cover those expenses. The previous paragraphs focused on the costs-expenditures side of the equation, identifying some of the choices and variables involved in estimating the future costs of home care, assisted living, and nursing homes. It cannot be overemphasized, however, that the costs of all long-term care services and facilities vary and change from year to year, from place to place, and in response to the level of an older person's physical and mental health status. Consequently, all financial planning for long-term care must be continuously re-examined in light of these changing (i.e., increasing) financial costs.

In one sense financial planning for long-term care is relatively easy for people who are already engaged in retirement financial planning. Information for the input side of the equation is already at hand: income from Social Security, employee pensions, continued full-time or part-time employment, other forms of savings and investments, home equity, and possible inheritances are already identified and estimated.

The expenditures or output side of the equation has also been somewhat identified as part of the larger financial planning process, including such items as children's or grandchildren's college education or other kinds of family support, future household expenses, taxes, debt reduction, payment for health insurance above and beyond Medicare, travel and recreation, and bequests.

In other words, the only task at issue is to add in the estimated costs of long-term care. In this context the previous discussion of home care, assisted living, and nursing homes should be of value. Each type of long-term care has its own set of choices, characteristics, and costs. Since the process of financial planning includes the development of alternative scenarios, with alternative estimates of both income and expenditures, long-term care financial planning should consider the desirability, likelihood, and costs of alternative kinds of long-term care.

Personal choices and values. All of the financial options that are examined as part of the alternative long-term care planning scenarios also should be evaluated in terms of nonfinancial personal values. This is especially critical when a middle-age child is involved in long-term care planning with, or for, an elderly parent. The following are just some of the values questions that should be part of the overall long-term care financial planning process. It should be emphasized that since the answers to some of these questions will likely change as the elder (parent or self) becomes less healthy, updated answers should be included as part of the continuing financial planning process.

• • Where does the older person want to live? In the same neighborhood as now? Where he or she lived as a young person or was born? Near a child or sibling? Near a current doctor? In the same neighborhood as church or synagogue? In a warmer climate?
• • How realistic is it that family and friends can provide some or most of the personal and residential care likely to be needed?
• • How devastating would it be if the older person had to leave the house or apartment that is now home? Is the older person willing to sell the house? If able to stay in the house, is he or she willing to apply for a "reverse mortgage," converting home equity to cash in order to pay for home care services, even though this means "going back into debt" as well as spending the equity that might have been bequeathed to children?
• • More generally, how important is it to not spend money so as to leave a bequest to family and friends, or to a charity or religious congregation?
• • To what extent is the older person willing to rely on public programs usually reserved for people with low income to subsidize his or her long-term care costs?

Overall, because long-term care is a component (albeit a potentially costly future component) of later life expenditures, it should be included in a family's general financial retirement plan. Even though some elements of the planning process, such as future costs and future probability of needing long-term care, are not easily calculated—or perhaps because they are not easily calculated—alternative scenarios that include a comprehensive range of long-term care decisions alongside financial and nonfinancial choices should be part of the overall financial planning process.

At the same time, financial literacy in the realm of aging, health, and long-term care is an important element of long-term care planning. It is especially important to understand that "usual" sources of health care finance are not available to pay for long-term care. For example, Medicare does not pay for chronic care in nursing homes. But because Medicare does pay for short-term, posthospitalization rehabilitative care (which can, and often does, take place in a nursing home), the American public continues to believe, incorrectly, that Medicare pays for long-term nursing home care. Similarly, family health insurance, Medigap insurance policies, and HMO health coverage typically do not pay for long-term chronic care. Physician services and medical procedures can continue to be received by older people who live in long-term care facilities and pay for them by Medicare, Medigap, and health insurance; such health insurance does not, however, pay for the residential and personal care that are the hallmark of long-term care. This is clearly a case of "what you don't know can hurt you."

Additional information. The bibliography at the end of this entry provides a fairly broad range of focused long-term care resources, including both general long-term care financial educational and background information, as well as checklists and interactive financial calculators for "testing" alternative financial planning scenarios. In addition, several aspects of long-term care financial planning are discussed elsewhere this volume.

Medicaid is a federal program administered under state auspices and regulations that provides health insurance for people who are low income or medically indigent. These health services include long-term care for those who are eligible for Medicaid coverage. Medicaid has become the single largest payer of nursing home bills in the country.

All families are familiar with life insurance, home (fire) insurance, and automobile insurance. In recent years, insurance policies have also become available to pay for some or all the costs of future long-term care. Many people resist long-term care insurance because they question whether they will ever really need it (they might stay healthy forever, or they might die before needing long-term care). Yet fire and auto insurance are purchased with the expectation and hope that they will never have to be called upon. A complete long-term care financial planning process should at least consider the characteristics and costs of such insurance.

Finally, there are several more general considerations that are connected to the financial planning for long-term care, including compiling up-to-date files of all financial and health records; and having a current will or other estate planning processes and documents; and having a health care power of attorney and living will to express preferences for end-of-life treatment.