The financial risk of Alzheimer’s disease

By Russ Banham
Russ Banham is a Pulitzer Prize-nominated journalist and author of 26 books on business and management.
Posted on Jan 26, 2018

I’m a baby boomer whose 92 year-old mother was diagnosed with vascular dementia shortly after she turned 80. Today, she is unable to communicate and cannot walk or otherwise take care of herself. Yet, I am fortunate; as I have two sisters who have stepped up to attentively care for our mom on a daily basis. She lives in one of their homes.

Dementia caused by Alzheimer’s disease and other degenerative brain diseases has been around for centuries, but only lately does it appear to be so evident. One primary reason is that people are living longer. Life expectancy at birth is at least 81 years in several countries, according to the National Institute on Aging.1 Most people born in the year 1900 did not live past age 50, before dementia often arises or appears.

Today, an estimated 5.5 million Americans of all ages have Alzheimer’s disease, of which 5.3 million are age 65 years and older, according to the Alzheimer’s Association. Approximately 32 percent of Americans 85 years and older have Alzheimer’s disease. When the first wave of baby boomers reaches age 85 in 2031, more than 3 million people 85 years and older will likely have Alzheimer’s disease. By 2050, the number could reach 7 million people in that age bracket.2

With regard to the costs of the disease, total payments in 2016 for individuals with Alzheimer’s and other dementias are estimated at $236 billion. While Medicare and Medicaid are expected to cover $160 billion or 68 percent of this total, $46 billion, or roughly 19 percent, is expected to represent out-of-pocket costs. Research by Genworth Financial, puts the national average annual cost in 2017 of a semi-private room in a nursing home at $235 per day or $85,775 annually.

Alzheimer’s: an uncomfortable subject to discuss

Like many people, my parents never discussed the possibility that we might someday have to care for them. I don’t recall them ever mentioning the words “nursing home” or “assisted living” or similarly unpleasant topics. Nevertheless, the high risk of dementia in the oldest cohort of Americans insists upon such frank discussions, said Terry Fulmer, president of the John A. Hartford Foundation, a private philanthropy with a mission to improve the health of older Americans.

“People need to discuss with their children the possibility of someday needing long term care services, whether they’re comfortable doing this or not,” said Fulmer, former dean of the College of Health Sciences at Northeastern University in Boston. “You want to do this when your children are young adults. It’s not an easy discussion, but it is necessary.”

Fulmer recommended in an interview that families have the same discussion with their financial professional.

“Assuming someone isn’t certified as indigent, there is no recourse to Medicaid to absorb the costs of long term care,” she explained. “Medicare also offers little in the way of financial assistance, covering long term care rehabilitation services temporarily after a three-day hospital stay and not necessarily in full.”

Long term care insurance: transferring the financial risk

Without government financial aid, the afflicted individual or the person’s family will have to assume needed long-term care expenses or provide this care themselves. Certainly, people can save for this possibility. Another alternative is to purchase long term care insurance.

The insurance may provide coverage to help pay the cost of long-term care in a variety of settings, such as a nursing home, assisted living facility or a person’s home. According to the American Council of Life Insurers, policyholders generally are reimbursed for the daily qualifying expenses up to a pre-determined financial limit for services assisting them with daily activities such as bathing, dressing and eating.

Not all long term care policies are alike, however, with some restricting coverage solely to care in an assisted living facility for a certain number of hours per day. Policies require a defined level of physical or cognitive impairment before the policyholder can collect benefits. The point here is to carefully read the long term care policy coverage terms and conditions, something an attorney or financial professional can assist with. (Related: Long term care insurance)

Other types of insurance policies may provide financial support to absorb some of the costs of dementia in certain cases. For example, disability income insurance helps replace income for a worker unable to work because of illness or injury, but to collect the benefits the policy must be in place before the symptoms of dementia appear. Likewise a long term care insurance policy must be in place before a diagnosis of dementia. (Related: Disability income insurance calculator)

Some whole life insurance policies also may provide a needed source of benefits. A person in the early stages of Alzheimer’s may be permitted to borrow from the cash value of their existing policy. However, tapping into the cash value of a life insurance policy reduces its value and death benefit and increases the chance the policy will lapse. And if a policy lapses with an outstanding loan in excess of the cost basis, the excess is taxable. There are also hybrid types of life insurance policies specifically designed to cover long-term care costs.

Few people buy long-term care insurance. According to the AARP, 8 million people have the insurance in the U.S.3 which, according to the latest census, has a population of more than 320 million people, with 43 million of them categorized as older than the age of 65.

“Many people tend to feel they won’t ever need long term care — the `It won’t happen to me’ syndrome,” Fulmer said. “Yet we all should be prepared for the possibility.”

The AARP concurs: “Part of the problem is widespread denial by consumers. If you're a healthy 50-something, it's hard to imagine that one day you'll be frail and unable to care for yourself.” 

Long-term care insurance can provide a measure of relief, knowing that the financial brunt of future care needs will be absorbed. There are many nuances to consider in purchasing the right type of insurance policy with ample financial limits of protection for a family’s financial needs.

For example, premiums in some policies (but not all) can go up over time. “You might pay $2,000 a year now, but down the line might be paying much more as premiums increase,” Fulmer noted. In such cases, the policyholder can offset some or all the additional costs through prudent investing. “That’s why a discussion with a financial professional is crucial,” she said.

The second caveat is to buy a policy that provides enough benefits when they are needed. “Two thousand dollars a year in premiums for $175,000 in coverage may seem like a lot more than what will be needed,” said Fulmer. “But time wears on and costs rise.”

Policy owners should also be aware of the financial strength of the insurance company they’re considering, which helps overcome another anxiety. As Fulmer explained, “You want to be sure you’re buying long-term care insurance from a stable company that will be able to bear its financial obligations in the future.” 

Should I buy long term care insurance?

Not everyone should purchase long term care insurance. The Alzheimer’s Association recommends that only people who can afford the monthly premiums should consider acquiring the policy. Certainly, someone having problems paying the monthly mortgage or rent, utilities, and other of life’s necessities should probably not be buying the coverage. 

Medicaid covers indigent people needing long term care services, and very wealthy people may have the financial means to pay for their long term care. “That leaves everyone else in the middle as potential buyers,” said Fulmer.

People in this category who are interested in purchasing long term care insurance may benefit by buying the coverage when they are young, as the premiums will be lower annually than they would be at a later age. By waiting too long to buy, people run the risk that a health care issue may arise that makes them ineligible for the insurance.

By all means, discuss the possibility of purchasing long term care insurance with family members. If you already have the insurance, discuss the policy’s financial limits of protection with your kids. They need to have a clear understanding of how they may be needed to assist mom and dad in the future — financially and emotionally. Like my sisters, they may be willing to care for their parents. What is most important is not to bury one’s head in the sand. Sure, this is a difficult subject to discuss with family members and others. But none of us is invincible.

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1 National Institute on Aging, “Global Health and Aging: Living Longer,” Jan. 22, 2015

2 Alzheimer’s Association, “2017 Alzheimer’s Disease Facts and Figures,” 2017.

3 AARP, “Understanding Long-Term Care Insurance,” May 2016.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.