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Planning for the Unknowable

Planning for the Unknowable

February 28, 2024

Planning for the Unknowable

The Complexity of Planning for Long Term Care Expenses

A couple of weeks ago, I moved my father (age 91) into an Assisted Living Facility.  He had been living right next door to me, so my wife and I were able to delay the move for quite some time since we had been able to keep a close and watchful eye on him, as he lived a semi-independent lifestyle.  But after several mishaps and some general physical decline, we opted to move him into assisted living.

Although initially resistant, Dad came around as he toured the facility.  He has his own room, his own furniture, and can decorate it with his favorite photos and artwork.  He can come and go as he pleases, walk around the grounds, and has all his meals provided for him, which he shares at a table with the other 3 men in the facility. (there are about 50 women!)  They have a happy-hour with beer and wine most afternoons and will gladly serve the same with dinner if that is your beverage of choice.  Where do I sign up? 

Those unfamiliar with the terminology may want to note here the difference between Assisted Living and Skilled Nursing (i.e. nursing home).  The first allows for a semi-independent lifestyle with help available for bathing, moving around, medications, etc.  The second is a much higher level of care which may be required for the extremely frail, or those requiring more intensive medical care and attention.  According to Boston College’s Center for Retirement Research, over ½ of individuals who utilize a nursing home use those services for 3 months or less.  The need for assisted living, however, can stretch on for many years.  

The economics of assisted living are highly cumbersome.  First, assisted living is very expensive.  At the very base level (where Dad is at now) the cost is around $260/day ($7800/mo).  It goes up from there based on how much hands on care you need.  In other words, if you need help dressing, showering, “transferring” (in and out of a wheelchair for instance) you pay increasing monthly fees.  Dad can afford to pay this for a while – but not if he lives to 97!  It is also true, however, that many of your other expenses go away.  You don’t need to buy food, pay property taxes, or rent, insurance, car expenses, etc.  But it is still a big financial nut at a time when many people have already depleted much of their resources. 

The good news is that some 20 or 30 years ago, Dad had purchased a very good long term care insurance policy.  The benefit is sufficient to pay for almost 5 years of expenses at his current level of care need.  That’s the good news.  The bad news is that he may not yet qualify for benefits under the insurance companies’ definitions of “needing care”.   That is a bit complicated.  There are two ways you qualify for benefits under his policy: 

  • Activities of Daily Living (ADLs). If you need help with 2 of 6 Activities of Daily Living, you can qualify for benefits.  The Activities of Daily Living are:  Bathing, Eating, Transferring, Continence, Toileting, Dressing. 
  • Cognitive Impairment. The individual needs stand-by care available due to loss of cognitive function. 

There are also recognized “Instrumental Activities of Daily Living” which are those activities one must be able to perform in order to live on one’s own safely.  Those include the ability to use a telephone, shop for food, prepare meals, manage medications, manage finances, etc.  Although these are very real, and inability to perform them certainly indicates a potential need for assisted living – the insurance company only recognizes the six ADLs noted above – and the cognitive impairment catch-all.

Dad has been declining somewhat physically – but at best we can argue for one of the six ADLs he needs help with.  We could perhaps place a claim based on the cognitive impairment loophole – but that is highly subjective and requires the insurance company to send out their own person (conflict of interest?) to assess his cognitive function.  Well, dad can carry on a lively conversation, and on any given day may or may not pass their tests.  So there is a very real chance that, despite paying premiums all these years, he may not qualify for benefits unless his physical or mental condition slips further. 

Long term care insurance is clearly not a panacea.  It does not immediately or always provide a solution to long-term care problems.  I am glad dad has it.  But he paid only a small fraction of the premiums that companies charge for similar policies today. 

So, let’s say insurance won’t pay, and dad burns through all his money paying these $8000 / month charges.  What happens next? 

In New Jersey, Medicaid will help pay for assisted living.  To qualify for Medicaid benefits, an individual must meet two criteria.  First, you must be broke.  Second, you (again) need to qualify medically – using the same criteria as used for insurance.  So again, for the “mildly impaired” such as dad, he could be left in a “no-mans-land” several years from now – out of money, not qualifying for insurance (that he paid for this purpose) and not able to qualify for benefits.  Options would be either a) family pays or b) family takes over caregiving. 

The facilities themselves also impose some restrictions on the use of Medicaid for their services.  Almost all the assisted living facilities require that you have privately paid for at least 2 or 3 years before they will allow you access to a “Medicaid room” – which is typically a little less “cushy” than the private suite Dad enjoys right now.  This then raises another problem. 

Let’s say he dutifully pays for his assisted living for several years, runs through his insurance benefits, then runs out of money.  He applies for Medicaid and gets placed in a “Medicaid room”.  But now suppose his care need increases to the point where the assisted living facility can’t provide the needed level of care.  Well, the majority of nursing homes also want to get a couple years of “private pay” out of you as well.  But now you don’t have any money!   Now what?   With choices limited to facilities that have available Medicaid beds, options for care may be limited and unattractive. 

It is difficult, rather, nearly impossible to make sound plans here because they all depend on the unknowable.  Dad is almost 92 and won’t be around forever – but he could live to be 100.   His health could decline, allowing him to access more financial assistance sooner rather than later – or he may remain stable.  

Dad is not unlike many parents.  He does not want to see all of his money go to the nursing home.  He wants to leave something to us kids.  But he also doesn’t want to “be a burden” on his kids.  He has done everything he can do.  He saved enough to achieve financial independence for all these years. He bought long term care insurance.  But things still are somewhat out of his control at this point.  Feels like we are running down the street at full speed blindfolded.  

So, what can you do to be as prepared as you can be? 

Insurance?  Maybe.  But the costs have gone up relentlessly in recent years.  Add high premiums to the possibility that you may not even qualify for benefits when you actually need them – and I am very cautious these days regarding insurance.  (If you have older policies you have paid into for years, however, you do want to keep them!)

Self-insurance.  This is simply the idea that you will pay for your own care someday.  Maybe you will sell your home and use the equity to pay for care.  Maybe you will spend down investments and retirement plans.  I will always include several years of long-term care expense in my financial planning projections – but the reality is that you simply don’t know how much you will need or when!   Is important then to plan your lifestyle expenditures and budget in retirement with the knowledge that you will likely need a large lump sum later in life for your care needs. 

Continuing Care Facilities.  These are communities in which you move into an “independent living” unit, fully able to care for yourself.  You then can move into assisted living and eventually skilled nursing within the same community as the medical need arises.  These facilities usually require a substantial deposit, which sits in escrow and can be used to fund future care needs if necessary.  You also pay rent, which increases as your need for care rises.  These facilities are attractive in that, so long as you are able to meet their financial criteria, your care needs will be covered.  Planning becomes somewhat easier.  The downside is that they aren’t cheap, and you generally need to make this commitment while you are still largely able to live independently. 

Medicaid planning.  This often involves planning for the government to pay for your care.  Such strategies often involve gifting away assets to impoverish yourself, thereby qualifying for Medicaid benefits.  This is a very tricky business.  When applying, Medicaid will look back through 5 years of financial records looking for any money you gave away.  They will then demand that money back (by disqualifying you from benefits for the length of care the gift could have paid for).  There is then the problem that so many facilities require “private pay” terms of 1 to 3 years before they will accept Medicaid.  So, Medicaid planning is perhaps feasible for some, it needs to be done very carefully with the aid of an attorney well versed in elder care law and Medicaid rules – which are incredibly complex.  It should not be undertaken without expert advice.  I know enough to know that I am not an expert! 


The more you live the more you learn.  Due to studies and workshops that I’ve attended, I already knew a lot about long term care, and Medicaid planning in particular.  Through this recent direct experience, I am now understanding the topic in a much more detailed and nuanced manner.   I am of course always open to conversations with clients to discuss – as long as you don’t expect a firm, sound plan. It’s virtually impossible to make one.