Are Clients Too Scared of Long-Term Care Costs?

But care costs rarely reached that level for younger people, or for married people, Banerjee reports.

The Urban Institute Study

Johnson and Favreault used a health care spending simulation system based on data from the Census Bureau’s Survey of Income and Program Participation and the University of Michigan’s Health and Retirement Study data.

The analysts defined economic hardship as having household income — minus out-of-pocket spending on health insurance premiums, long-term care insurance premiums and other health care expenses — under 100% of the federal poverty level.

This year, the federal poverty level for household income is $13,590 for a one-person household in most of the United States and $18,310 for a two-person household.

The analysts presented many tables that broke results down by people’s lifetime earnings “quintiles,” or fifths of the population.

Households in the middle fifth in terms of lifetime earnings, for example, end up with an annual income of about $60,000 to $104,000.

Households in the top fifth end up with incomes of about $200,000 or more per year.

Middle Earners and Top Earners

When people needed fewer than two years of long-term care, 76% of the middle earners suffered economic hardship, and just 48% of the top earners suffered economic hardship.

When people needed two to four years of long-term care, the percentage of people experiencing economic hardship was 85% for the middle earners and about 69% for the top earners.

When people needed five or more years of care, 88% of the middle earners and 81% of the high earners suffered economic hardship, according to Johnson and Favreault.

Similarly, Johnson and Favreault found that top earners younger than 76 were much less likely to need long-term care than young middle earners.

But, once the top earners were ages 85 or older, their need for long-term care was similar to middle earners’ need for long-term care.

The Disclaimers

Agents and advisors will have to take their clients’ circumstances and views into account when applying ideas from the Banerjee and Urban Institute analyses.

The current income cutoff for Medicaid eligibility is less than $30,000 per year for a two-person household in much of the country, according to Policygenius, and Banerjee included older adults’ home equity in the net worth calculations.

Some clients might see having an annual household income under $30,000 or using a large amount of home equity to pay for long-term care as a bad outcome.

Another issue is that clients might disagree about how to handle serious but relatively low-probability risks.

One affluent client might see a 5% risk of spending $94,500 out of pocket on nursing home bills after age 90 as a nuisance.

Another, otherwise similar affluent client might see even a 1% chance of spending that much on nursing home care late in life as alarming.

Banerjee’s Advice

Banerjee recommends that clients consider whether they should self-insure; buy stand-alone long-term care insurance or products that combine LTC benefits with other types of insurance; or use products such as deferred income annuities to provide income in later years.

“While the numbers suggest it’s unlikely that health care expenses incurred during the last two years of life will exhaust people’s assets among the non-Medicaid population, the possibility can’t be completely ruled out,” he says. “Therefore, it’s necessary to plan.”

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