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Ways to Fend Off The Wealth-Sapping Costs of a Disability

Photograph by Penny Klepuszewska/Gallery Stock Close

Photograph by Penny Klepuszewska/Gallery Stock

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Photograph by Penny Klepuszewska/Gallery Stock

Lynn Francis was worried when her 81-year-old mother Joann started forgetting things a few years ago. Her fear turned to panic as her mother began inviting strangers into her house and giving away bank account information to just about anyone on the other end of the phone.

Joann has become increasingly reclusive, afraid even to leave her house to go to the supermarket lest she forget how to find her way back. Lynn, who lives four hours away in Beaverton, Oregon, now takes turns with her sister buying her mother groceries. “Living alone has really become a safety issue for her,” says the 58-year-old yoga instructor. She's trying to convince her mother to move into an assisted living facility.

Looking after the aging, especially those with mental and physical incapacities, is almost always emotionally and physically exhausting for families. It can also become a financial nightmare as families struggle to cover the costs of medical care, assisted living facilities and nursing homes -- a burden far greater than most people realize.

“Incapacity planning is not just for someone with Alzheimer’s who can’t make any decisions,” says Martin Shenkman, a Paramus, N.J.-based estate planning lawyer who lectures on incapacity. "It affects a huge number of people, far more so than most imagine.”

Worldwide, 35.6 million people have dementia, according to the World Health Organization. Those numbers are expected to double by 2030. Meanwhile, strokes permanently disable 5 million a year. While most people plan for their inevitable mortality with life insurance and a will, many ignore the risk of permanent incapacity, which can be far more devastating to their family’s finances. According to a 2012 study done by insurer MetLife, a stay in the average U.S. assisted living facility costs $42,600 a year, while a private nursing home costs upwards of $81,030. The typical length of a nursing home stay is 835 days.

Preparing for Incapacity

In some respects Lynn is ahead of the game in her planning. Her husband, Russell Francis, is a financial planner at Portland Fixed Income Specialists and has made projections of the cost of Joann’s future care. Moreover, three years ago Lynn got her mother to sign one of the most important documents in anyone’s incapacity plan — a financial durable power of attorney. This allows Lynn and her sister to manage Joann’s financial affairs during her incapacity. They can pay her bills and receive her bank statements, ensuring that no one is illegally accessing her accounts. A subset of this document known as a “springing power of attorney” ensures that this power is only conferred when your doctor has officially declared you incapacitated.

Lynn also had her mother sign a health care power of attorney, sometimes called a health care proxy. That allows her to make medical decisions for her mother in the event that she can’t do it for herself. Her mother also has a health care directive or “living will.” That provides instructions on whether hospital staff should attempt to save her life if she is afflicted with a life-threatening illness.

While a power of attorney or POA document is essential, it is “woefully inadequate” for solving many of the problems that crop up during incapacity, according to Shenkman. Trusted family members should also know where all of your passwords, IDs and account numbers are. Without those, whoever is stepping in to manage finances will be hard pressed to help out.

Consider consolidating your accounts with a reputable financial institution and putting assets in a trust to simplify things. Shenkman generally recommends clients get what is called a revocable living trust with family members as successor trustees, or what is sometimes called disability trustees. That's because successor trustees have a clearer line of authority to manage your assets when you can't, he says. When you use a POA there are many more steps for your legal agents to take in order to gain control. Shenkman also recommends your financial institution be co-trustee with you in case your successors aren’t up to the task.

Goldilocks Criteria

Long-term care insurance can be a lifesaver when someone becomes incapacitated, but it’s pricey. And a lot of insurance companies have exited the long-term-care insurance business, which was becoming unprofitable in part because people were living longer. Companies that still offer the coverage include John Hancock Financial Services, a unit of Manulife Financial Corp., Mutual of Omaha, MedAmerica and Massachusetts Mutual Life Insurance Co.

The older you are, the higher the premiums on long-term-care policies get. Married couples can get a discount by as much as 30 percent if they buy a policy together, says Babs Hart, a long-term care specialist at The Hart Insurance Group in Birmingham, Alabama. A typical policy for a couple of 60-year olds might run $3,500 a year instead of $2,500 a person separately, she says. For a 50-year-old couple premiums might be $2,000.

The wealthy probably don’t need the insurance as they can pay for their care out of pocket. Meanwhile, the poor and the middle class will probably spend down their assets for care quickly and then Medicaid will cover their nursing home. Yet there is a Goldilocks group of people ideally suited for this insurance. Typically they should get it between the ages of 50 and 60 and have between $500,000 and $2 million in assets, says Francis. He recommends coverage for three years of care which is affordable yet enough to cover a typical stay in a nursing home.

For those who don’t fit this Goldilocks criteria there's another option -- a hybrid policy where you have a life insurance contract with a long-term care rider. “If you buy $500,000 in life insurance and die in a motorcycle accident, you get the death benefit," says Hart. "If you live to 85 and need long-term care, then that $500,000 benefit is applied to your care.”

Another alternative could be to get what is called an accelerated death benefit rider on your existing life insurance policy. This benefit enables policyholders to receive cash advances against the face value of their insurance if they are diagnosed with a terminal illness or have some other disability. James H. Hunt, a life insurance expert at advocacy group Consumer Federation of America, says he prefers accelerated death benefit policies because they can be cheaper than hybrid policies with long-term care benefits.

Even if you do everything right, dealing with incapacity can be a painful experience. Two of Hart’s clients, Lena and Donald Knight, both had long-term-care policies when Donald was diagnosed with Alzheimer’s six years ago. They opted for $140 a day worth of coverage for three years. Donald’s coverage ran out this January. Now Lena is paying $6,000 a month out-of-pocket for his care in a nursing home. Donald, 76, has longevity in his family. His mother lived until age 99.

Perhaps the hardest part for Lena is visiting her husband of 26 years who cannot stand, wears diapers and has to be spoon-fed. “Sometimes he will volunteer a thought with two or three words," she says. "The other day I walked in and he said, ‘I love you.’” Maybe in the end that’s all one needs to hear to make sure a family member is properly taken care of.

(Lewis Braham is a freelancer based in Pittsburgh.)

To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net

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