What Cognitive Decline Means For You... And Your Kids

by: Evan Powers


A recent study showed that cognitive decline sometimes causes unintentional lapses in long-term care insurance policies, right when policyholders are about to need the benefits of those policies.

In more than half of states, filial responsibility laws could hold children legally responsible for their parents' medical costs, even in the case of an unintentional insurance policy lapse.

Intergenerational conversations about long-term care plans are essential, especially if a long-term-care insurance policy is a part of the older generation's plans.

Last week, I published an article here regarding millennials' largely unrecognized (and unmet) need for the counsel of financial advisers, particularly comprehensive planners operating under the fiduciary standard. After the post ran, I recognized that one of the piece's more important points had probably gotten short shrift, buried as it was after a relatively long discussion of a number of other involved issues.

As I wrote then (and will expand upon today):

"Even for those families where inheritances and estate planning are not a primary consideration, intergenerational planning can still be incredibly powerful, due to the specter of long-term care costs.

According to industry estimates, 70% of current retirees are expected to utilize long-term care at some point in their latter years. With costs for long-term care reaching as high as $100,000 per year, millennials need to be aware of the potential burden -- financial or otherwise -- that may soon fall on their shoulders as their parents age."

Indeed, the issue of potential long-term care costs is one that millennials and boomers should not take lightly, both for logistical and legal reasons, which I will describe shortly. But in general, studies to date have indicated that simple conversations about intergenerational money flows just aren't taking place, at least not often enough or in sufficient detail.

Millennials and their parents have seemingly been reluctant to share the details of their financial situations with each other, and they certainly have not embraced the potential benefits of collaborative planning, particularly not with the assistance of a financial advisor. Here's why they should reconsider their reticence.

Cognitive decline can have severe consequences

A number of recent studies have pointed out the danger that cognitive decline can pose for aging baby boomers, even those who are able to escape the insidious effects of Alzheimer's and other dementia-related disorders. According to one report, older individuals are estimated to experience a 1% drop in their financial literacy scores for every year past the age of 60 (though their confidence in their own abilities does not decline). Given that life expectancy continues to rise for all Americans, the cumulative impact of that cognitive decline is likely to be more acute for the current generation than for any other before it.

Unfortunately, for today's retirees, that decline can represent a double-edged sword, as a 2015 report from Boston College's Center for Retirement Research described:

"More than one quarter of individuals who buy long-term care insurance at age 65 will lapse their policies before death, forfeiting all benefits. Economic theory predicts that individuals at high risk of needing care should retain coverage... but the data show the opposite pattern: people who subsequently use care are more likely to lapse...

[One] explanation for lapses is that they are unplanned and are due to poor financial decision-making, perhaps resulting from cognitive impairment. For example, individuals could forget to pay their premiums or no longer understand the potential value of their policies. In this case, individuals would be more likely to lapse even though their impairment makes them more likely to need care."

Indeed, the BC researchers found significant support for their so-called "Forgetful Lapsers" hypothesis, indicating that a meaningful number of individuals who need long-term care are unintentionally allowing their insurance policies (which would otherwise have covered those costs) to lapse, right when they need them the most.

As one of the study's co-authors explained, "People who suffer a cognitive decline have trouble remembering to pay their bills, and one of those bills can be for long-term care insurance... Then, the premium doesn't get paid. And these are the very same people who are likely to go into long-term care due to cognitive impairment."

Of course, these unintentional lapses can have follow-on impacts that go beyond just the individual who needs long-term care. After all, if the individual had long-term care insurance in the first place, then the existence of that policy is an indication that the individual did not have other means by which to cover those expected costs (they were relying on the policy to cover them in the case of a long-term care need). Reinstatement of a lapsed policy is possible, but the process can be arduous, and neither the parents nor the children should count on reinstatement to save them in the event of an unintentional lapse.

So if these "Forgetful Lapsers" end up needing long-term care, but they have no financial assets with which to pay for those expenses, what happens?

Enter filial responsibility laws

Here is where we link back to our discussion of millennials and boomers and their (largely non-existent) conversations about intergenerational financial planning. In more than half of U.S. states and territories, the financial responsibility for the cognitively-impaired parents could fall to their children, due to the existence of filial responsibility laws. Under these laws, children can be held legally responsible for the financial obligations of their parents, even if their parents are no longer mentally capable of making sound monetary decisions.

While these laws have largely been ignored or misunderstood to date (and their enforcement has remained uncommon), at least one recent case in Pennsylvania did hold a child responsible for his mother's nursing-home bill, totaling $93,000. Due to the increased longevity (and precarious financial position) of the baby boomer generation, many industry experts are now predicting that enforcement of filial responsibility laws will become more common, especially as the boomers approach the later stages of their retirement years and begin needing expanded care.

If those experts are indeed correct, the financial burden on millennials could be considerable. As I pointed out in my previous article, annual costs for long-term care can approach $100,000 in some areas. In fact, the median annual cost for a year's stay in a private room in a nursing home reached $91,250 in 2015, and even basic assisted living costs worked out to a median of $43,200. Of course, those costs can be even higher for folks living in some of the higher-cost states in the union, with many of the New England states leading the way (Connecticut, for example, clocks in at a median annual cost of $160,600).

As I've previously conceded, most millennials are already starting out their adult lives way behind the financial 8-ball. Tending to their parents' mounting medical bills would represent a hill too steep for many of them to climb.

The role of intergenerational planning

Given the mounting costs of long-term care (and the aforementioned risk associated with long-term care policies), it is vital that the older and younger generations come together to discuss potential eventualities before they occur, and not after. If a parent has planned for their own long-term care - either via a long-term care policy or via "self-insurance" from other financial assets - then they need to communicate that plan to their children or other trusted individuals.

If that plan includes a long-term care insurance policy, then some sort of "backup plan" should be devised, lest cognitive decline lead to a missed premium payment down the road. Even if that backup plan does not include a direct inclusion of the policyholder's children (an individual could, for example, simply ask a trusted financial or legal advisor to check in on the premium payments on a semi-regular basis), it's probably a good idea for the children to at least be aware of the parents' wishes in the case of future incapacity, particularly due to cognitive impairment.

Even in a lapse-free world, long-term care insurance policies are far from perfect, and many retirees may have already noticed that the terms of the policies are getting worse, not better. But for those who do have policies, all proper precautions must be taken to ensure that their benefits are paid out as intended, and that other family members are not needlessly held responsible for the medical needs of the aging generation.

The older and younger generations must get on the same page and communicate openly about long-term care plans, before cognitive decline begins to get in the way. Even if a financial advisor is not involved in the conversation, a thoughtful plan that considers the financial resources of the family in its entirety should be devised and implemented.

Estate planning and long-term care planning are not optional exercises, nor should they be delayed until an amorphous "tomorrow." The sooner these conversations can happen, the better, for all parties involved.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The author is a contract employee and partial owner of myFinancialAnswers.com, and he is compensated to provide industry commentary for the site. The opinions provided here may also be published at myFinancialAnswers.com.

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