Even after you are all grown up, your parents can still have a big impact on your life. Even though they want to be independent, and you want them to be, you may feel the need to help them in a number of ways, both formal and informal. Many children help their older parents directly – doing chores, running errands, paying bills, even providing care. Some children provide financial support, too. As with many aspects of life, your interaction with your older parents can run more smoothly with some planning and preparatory discussion.
A recent Wall Street Journal article, “‘The Talk’ with Mom and Dad” described one area that many children help their parents with – the decision about where they should live as they get older and need more help. The choices can be bewildering – stay at home and get help, move to an independent or assisted living arrangement, possibly a Continuing Care Retirement Community, and if a lot of help is needed, a nursing home.
As the article suggested, however, decisions beyond the nature of the arrangement are also important. What area will they live in – the one they know and where their friends are, or one near you, so that it’s easy for you to visit and help out? And, once they decide on a location, there are frequently several choices within a category – some larger, with more resources, some smaller and friendlier – some closer to you, others further away.
I’m going to focus on another aspect of this decision – how to pay for it, and especially how to pay for long-term care.
First, what is long-term care? It’s not medical care. Long-term care is help with the Activities of Daily Living or ADLs (eating, bathing, transferring, dressing, and using the bathroom). If your parents need help with some of these, they need long-term care. They can receive long-term care in all of the places that I mentioned earlier – at home, in assisted living, in a Continuing Care Retirement Community, or in a nursing home.
Aside from finding the right place, there are two additional issues with long-term care: it can be expensive, and it’s uncertain whether your parents will need it, and if so, for how long. While the conversation may be difficult, it can be very valuable to discuss this with your parents well in advance of when they may need long-term care. In fact, you almost can’t start soon enough.
Because the need for long-term care is uncertain and the potential cost is very large, it’s a natural opportunity for insurance. Today, the US government and the states provide insurance for all those who cannot afford care through the Medicaid program. However, to be fully eligible for Medicaid, your parents will need to have very few assets and very low incomes, and eligibility requirements have been tightening.
Alternatively, your parents can self-insure – they can simply plan to pay for whatever care they turn out to need. If they need little or no care, or if their assets are very large, this will work out just fine. However, if they need a lot of care, the cost can dramatically deplete their estate, which they (and you!) may find to be very distressing. In addition, if you end up paying the bills, and you are watching the assets drain away as you pay for their long-term care, you may end up worrying about whether there will be enough, and about what to do if the assets run out.
Finally, there is long-term care insurance. Long-term care insurance provides a sum of money that is available to fund long-term care. Most long-term care insurance policies describe their benefits in terms of the daily benefit (for example, $100 per day) and a benefit period (say, 2 years). The total benefit is the total dollar value of the daily benefits (in our example, $100 per day times 365 days per year times 2 years or $73,000).
Your parents can buy a little (a small total benefit) or a lot (a large total benefit) of long-term care insurance. Importantly, if your parents do decide to buy insurance, they don’t need to buy enough to cover the entire cost of care. For example, if they have $24,000 per year in Social Security benefits, that will cover the first $24,000 per year (or so) of long-term care costs.
How can you help your parents decide on the best approach for them? The first step is to start the discussion. You can ease into it by talking about helping them stay independent for as long as possible (at home vs an institution, assisted living vs a nursing home). Then you can talk with them about how they might pay for long-term care. Think through the three broad choices (Medicaid, self-insurance, long-term care insurance) with them.
If they do decide that long-term care insurance would make sense, you can help them sift through the alternatives. Long-term care policies can be very complex, with lots of options. Two heads can be much better than one in coming to a decision.
In addition, buying a policy sooner rather than later has two important advantages. Annual premiums are lower for people who buy a policy earlier in life. And, the longer your parents wait, the more chance there is for their health to get worse. Insurance companies strongly prefer to sell long-term care insurance policies to healthy people. If your parents wait too long, they may not be able to obtain coverage.
Finally, if your parents decide they cannot afford long-term care insurance, you and your siblings may offer to help pay the premiums. Even though only your parents are eligible for financial benefits from their long-term care insurance policies, you and your siblings can receive intangible benefits. Knowing that your parents will be able to afford some long-term care, and that you have taken steps together to protect your inheritance can provide you with considerable peace of mind.
Rick Miller, CFP®
Sensible Financial Planning & Management