April is Financial Literacy Month–the time for all of us to strengthen our money skills and set a course to financial independence. Since 2004, educators and agencies have hosted events and programs throughout April to promote financial learning. In the early years, those initiatives were targeted towards younger Americans. Today, Financial Literacy Month has broadened to include adults and seniors as well.
That expansion is appropriate and much needed. Seniors, for example, can have good financial skills but still be tripped up by inflation and its effect on their fixed budget. This has become clear over the last 18 months, as inflation rates tripled relative to historic averages. Seniors, unlike working adults, can’t offset higher prices with higher wages.
Seniors have the added challenge of managing unpredictable long-term care costs. Statista estimates long-term care costs in 2021 ranged from $20,280 annually to $108,405, depending on the type of care required. Sadly, inflation only pushes that number higher. For context, health care inflation reached 6% in September of 2022. The rate has moderated somewhat since then, but health care costs are still rising–just by smaller amounts.
Absorbing long-term care costs takes solid retirement planning and budgeting discipline. Seniors can start that process now–and participate in Financial Literacy Month at the same time–by reviewing this brief guide. It includes an overview of the most common types of senior care, plus three potential funding sources for those costs.
What are the most common types of senior care?
The five most common types of senior care are custodial at-home care, at-home health care, adult daycare, assisted living, and nursing home care. Here’s a closer look at each.
Custodial At-home Care
Custodial at-home care includes a range of nonmedical services provided in the senior’s home. These services include housekeeping, meal preparation, and companionship as well as assistance with eating, dressing, bathing, and going to the bathroom.
In 2021, long-term care insurance provider Genworth estimated the national median cost of custodial at-home care at $4,957 monthly. At that time, Genworth also concluded that inflation would push this cost to $5,259 by 2023.
At-home healthcare is delivered by trained home health aides, who work under the direction of the senior’s physician. Home health aides provide support for eating, dressing, toileting, and bathing. They also monitor the senior’s condition and demeanor, periodically check vitals, and give medication.
Home health aides do cost more than in-home custodians because they have added health care training and greater responsibilities. Genworth estimates the 2023 median cost at $5,462 monthly.
During daytime hours, adult daycare facilities supervise and help their seniors with basic needs and medications as required. They also organize group activities, and some provide additional health-related services such as physical therapy and speech therapy.
The estimated median monthly cost of adult daycare is $1,793. Seniors typically also need the assistance of family members or home health aides when they are at home.
Assisted living is full-time, residential care that provides custodial services and some medical care. Seniors in assisted living communities have varying levels of independence. Some are highly functional, while others require near-constant supervision.
Median assisted living costs are an estimated $4,774 monthly but could be much higher depending on the level of care required.
Nursing homes provide medically supervised residential care for seniors who aren’t independent enough to reside in an assisted living community. The environment of a nursing home is more clinical vs. assisted living, primarily because residents have limited mobility and, sometimes, declining cognitive function.
Estimated median monthly costs for nursing home stays range from $8,390 to $9,584. HealthinAging.org reports that about half of nursing home residents stay for at least one year. At the lower end of the median range, a one-year residence will cost more than $100,000.
How to pay for senior care costs?
Many seniors do not have the savings cushion on hand to fund $5,000 to $10,000 in extra monthly expenses. So, covering these costs in cash is generally not an option. Seniors instead must find other funding sources for long-term care. Three common ones are long-term care or assisted living insurance, selling life insurance, or Medicaid.
Long-term Care or Assisted Living Insurance
Long-term care insurance reimburses insured seniors for costs related to assistance with activities of daily living. These policies typically have a lifetime payout cap, consisting of a daily reimbursement cap and a cap on the maximum number of days the policy will cover.
Long-term care insurance is most affordable when it’s purchased at a young age. Seniors with existing health problems may not qualify at all or will pay prohibitively high premiums.
Selling life insurance
Many seniors have unknown wealth hiding in a life insurance policy. Selling that policy via a life settlement can unlock that value. One study concludes that a life settlement returns four times more cash to the policyholder than a cash surrender.
The life settlement process involves transferring a life insurance policy to a third-party buyer, either directly or through a broker. At the close of the transaction, the seller receives a lump sum of cash. The policy and the premiums, in turn, transition to a new owner. There is no restriction on use of the life settlement proceeds, other than paying any resulting taxes.
Medicaid may cover certain long-term care costs, for those who are Medicaid eligible. The eligibility standards for Medicaid, however, are needs-based and very strict. For context, it is possible to earn income below the federal poverty limit and still make too much to qualify for Medicaid.
Seniors who are near the income and asset limits can “spend-down” their wealth to qualify. This is a complex strategy that should only be pursued with the help of experienced financial and Medicaid advisors.
Get the best possible care in retirement by planning ahead of time
The cost of long-term care has long been a financial challenge for seniors. In this era of high inflation, that challenge becomes even more extreme.
Planning early–before long-term care is required–is the best way to manage these costs. That planning can entail researching long-term care insurance premiums and options, valuing life insurance policies with a life settlement company, and understanding Medicaid eligibility requirements. All three are savvy financial moves, and highly practical ways to participate Financial Literacy Month.
Lucas Siegel is the CEO of Harbor Life Settlements and Harbor Life Brokerage, which offers a life settlement auction site and an AI-powered life settlement calculator.