In fact, three Purdue University finance experts say too many people are uninformed about how they could pay for long-term care for their parents or themselves.
"People don't realize how expensive long-term care can be, and they are ill-prepared to deal with the inevitable," says Sharon A. DeVaney, assistant professor of consumer sciences and retailing. "Waiting until the last minute, or until there is a crisis, can be economically catastrophic."
Statistics show that Medicare pays less than 5 percent of the cost of nursing home care in the United States. Medicaid, which pays an estimated 48 percent, in most states will not pay the nursing home bill until assets are reduced to $2,000. (Spouses at home can keep approximately $70,000 of the couple's combined assets.) Government efforts to balance the budget by cutting annual increases in Medicaid and Medicare reinforce the need for financial planning, the Purdue experts say.
DeVaney and her colleagues, Janet C. Bechman and Flora L. Williams, recently interviewed a representative sample of 43 families to determine their knowledge and awareness of the alternatives for financing long-term care. The results of the study were presented last November at a national conference of the Association for Financial Counseling and Planning Education. The three experts say the study is important because the nation is about to experience a dramatic shift in the age of its population.
"According to the U.S. Department of Health, the most rapid population increase over the next decade will be among those over 85 years of age," DeVaney says. "Studies show that by the year 2020 there will be 12 million elderly who need some sort of long-term care. Seven percent to 12 percent of workers are already caring for an elderly relative. By 2020, that number is expected to be 33 percent."
Bechman, an Extension Service specialist, says long-term care costs are rising fast.
"Right now, it costs approximately $32,000 a year for nursing home care," she says. "Experts predict that today's 50-year-old will pay approximately $141,000 a year at age 80. That's why it's so important to educate people now about financial alternatives."
Financial planners and counselors need to know how knowledgeable their clients are in order to give sound advice, says Williams, associate professor of family and consumer economics.
"As a financial counselor, I have to be careful not to assume that people understand their options," she says. "They may know of a few, but those may not be the best alternatives for their situation."
Williams and her colleagues studied the awareness of four main alternatives: private long-term care insurance, accelerated death benefit, reverse annuity mortgage and housing lease-back. About half of the study participants said they were knowledgeable about long-term care insurance, but in-depth knowledge about premium costs and restrictions was sparse.
"Cost and coverage are considerations when purchasing long-term care insurance," says Williams. "This insurance can cost $2,000 a year or more depending on a number of factors. Age is the key determining factor of cost, that's why we recommend purchasing the insurance at an early age to reduce premiums and to lower the risk of being ineligible because of age. Investing the amount equal to premiums may be a better alternative for some people."
Private long-term care insurance, which pays about 1 percent of the long-term care costs in the United States, certainly isn't for everyone, Williams adds.
"Simply put, this type of coverage is for people who can afford it, and many elderly don't have the resources needed to cover the premiums, the deductibles or the out-of-pocket expenses," she says.
Another option is an accelerated death benefit -- an advance of the proceeds of a life insurance policy during the insured's life. Bechman says 53.5 percent of the participants were aware that a living rider could be used to pay for long-term care.
"The bad news is that only 16.3 percent knew they may have to pay extra premiums for the rider," she says. "They also didn't know when the rider would go into effect."
Bechman says retirement-age individuals are the least likely to be aware of this alternative.
"Of people who are 66 or older, 85.7 percent reported not being aware of an accelerated death benefit," she says. "This benefit has some important ramifications for the beneficiary of such a policy. Benefits are subtracted from the payment to the beneficiary when the policyholder dies. One of the main reasons people buy life insurance is to support the beneficiary after the policyholder dies. In some cases, the full benefit is more valuable to a surviving spouse than the accelerated benefit."
One of the more expensive ways to generate income is the reverse annuity mortgage. Such a mortgage allows a person to borrow against their own home's equity. They may choose to receive the money in one lump sum; a monthly cash advance; a credit line; or a combination of these. The person taking out the mortgage remains owner and must continue to pay property taxes and homeowner insurance and make repairs. When the loan is over, the owner or the heirs must repay all cash advances and any interest charged on them.
A reverse mortgage differs from a home equity loan in that there are more restrictions, applicants must typically be of a certain age, and a larger sum of money is involved.
"Seventy-nine percent of the participants were aware this option exists," Bechman says. "However, 30.2 percent said they would consider the option only if they were desperate, in need of immediate funds or had depleted all other assets.
"Reverse mortgages are ill-advised for elderly persons who have alternative investments or income from savings. This option can be very expensive, particularly in periods of high interest rates if the home doesn't appreciate enough to cover the interest expense of the loan. What it amounts to is paying a substantial amount in interest and loan charges for the privilege of borrowing your own money."
A lesser-known alternative is the housing lease-back option. DeVaney says that only 46.5 percent of the participants were aware they could sell their home and lease it back. The option has some attractive features, such as reducing the estate tax burden for a relative who would inherit the property anyway.
"The elderly don't have to pay property taxes, insurance or maintenance costs while continuing to live their own home," DeVaney says. "Buyers win because they can deduct these expenses along with the interest portion of the purchase payment. But finding a buyer or financial institution that is willing to make a long-term investment isn't so easy."
While these aren't the only options, DeVaney says they are some of the more complex and obscure alternatives. One problem experts encounter in their efforts to educate the public is that younger people may be reluctant to think about long-term care.
"It's an uncomfortable topic and can be very confusing," she says. "As people get older, however, they become more concerned about their options -- they just don't have access to enough information. Research suggests that people 50 to 65 years old who have family members or others who need long-term care are most interested in information about financing long-term care options. More programs and literature need to be created and targeted to people who need this information. Financial planners need to do a better job of educating the public."
Sources: Sharon A. DeVaney, (765) 494-8300; Internet, firstname.lastname@example.org
Janet C. Bechman, (765) 494-8309; Internet, email@example.com
Flora L. Williams, (765) 494-8297; Internet, firstname.lastname@example.org
Writer: Victor B. Herr, (765) 494-2077; Internet, email@example.com
Purdue News Service: (765) 494-2096; e-mail, firstname.lastname@example.org
NOTE TO JOURNALISTS: A color photo of a financial counseling session is available from Purdue News Service, (765) 494-2096.
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