Advisors know that even wealthy people can wind up on Medicaid if they don't plan accordingly.
Mary Janisch, Midwest Division manager for U.S. Bank's mass-affluent-focused Private Client Group, holds up her parents as real-life examples of how easily that can happen.
Her parents, now both deceased, had money, were successful and had planned for the future, but as is often the case, life didn't play out for them as they expected. Her father, a successful medical malpractice defense attorney, had a serious heart condition, suffering the first of five heart attacks at age 47. He had quadruple bypass surgery and "every other type of heart procedure that is life-prolonging," says Janisch.
Given his history, the couple did their best to protect Janisch's mother, thinking she would likely outlive her husband. They bought a whole life insurance policy for Janisch's father and a long-term-care policy for the mother because Alzheimer's ran in her family.
As fate would have it, though, it was Janisch's mother who passed away first—from cancer at age 72. And the father, in another cruel twist of fate, developed Alzheimer's, leaving him vulnerable to an unscrupulous young woman who took advantage of him financially.
As a result, her father was left with only his VA and Social Security checks for income. He lived with his other daughter for a period of time, but as his disease progressed he had to be placed in a memory care unit of a nursing home, which cost $9,000 a month. The father had no choice but to go on Medicaid.
"He lived with means, but he certainly died without any," Janisch says.
Janisch notes that while her parents had received plenty of "fragmented advice" over the years, they had no one to pull it altogether. "They were from a generation where they didn't share much about their financial situation or their plans," Janisch says. "They did the best they could, given the information they had."
Without a well-conceived, "holistic" financial plan, Janisch realized, destitution can strike anyone, rich and poor, especially if they're hit with Alzheimer's or other degenerative disease requiring long-term care. "Regardless of income level, you may not have the right things in place to protect your means. You'd be amazed at how quickly a devastating disease like Alzheimer's can eat through what little you have," she says.
In fact, it is estimated that 21.6% of long-term care costs are financed out-of-pocket by families who spend down their assets and then go on Medicaid, according to the Federal Commission on Long-Term Care.
'Medicaid Estate Planning'
Reliable statistics as to the demographics of these families were hard to come by, with two camps offering different views as to what they looked like. One group believed that the majority of the families were indeed in dire straits and had genuinely run out of money. The other believed that many families had done creative "Medicaid estate planning," intentionally spending down their money so as to appear poor and be eligible for Medicaid.
"There are two camps along those fault lines," says John Cutler, the architect of the federal government's long-term care insurance program, the largest in the country. "One believes a lot of Medicaid estate planning is going on and the other isn't sure it really is that big of a problem."
Whichever the case, being on Medicaid is not an enviable position to be in. Nursing home residents on Medicaid have to hand over all of their income, save for a small personal allowance, to the nursing home. In addition to a $60-a-month allowance, which varies slightly by state, nursing home residents are also allowed to deduct uncovered medical costs and an allowance for their spouses, if they live at home and need income support.
Moreover, nursing home facilities that accept Medicaid tend to be underfunded, so they're unable to hire the best people and provide the best care, many experts say.
"It was challenging," Janisch says of her dad. The meager stipend he received didn't cover certain things like haircuts, and they had to keep detailed records and receipts of everything they spent the stipend on.
Advisors, of course, do their best to prevent their clients from falling into such a financially tenuous situation. Some use long-term care insurance and other products to help clients take the bite out of the huge costs they could incur if they become incapacitated.
Not Just Long-Term Care Insurance
For many, it's not merely a matter of buying insurance but rather overall retirement planning. "In some cases, people may have to look into working longer than they might want to otherwise. It's saving more, spending less, making the most out of Social Security," says Joseph Tomlinson, a financial planner with Tomlinson Financial Planning, an investment advisor firm in Greenville, Maine.
Bradley Sova, a senior financial consultant with credit union DFCU Financial in Michigan, advises clients to start planning early and to make sure they're contributing enough money toward their retirement savings."I think it's important that you have a plan at a younger age. Don't wait till you're 55 or 60 years old to start thinking about this stuff. You have to start decades in advance," he says.
Craig Bartlett, a division manager for U.S. Bancorp Investments, the brokerage arm of U.S. Bank, urges his advisors to have their clients "stress-test" their plans. "Don't just assume that things will continue on its way, but model in the impact of a long-term care event, model in the impact of a dramatic health issue," Bartlett says. "Often times what you'll find is that the plan that looks like you're in terrific shape doesn't really stand up to some challenges that might come."