The Surprises Your Clients Must Avoid As They Near the Need for Long-Term Care

Late-life finances can be the toughest conversations for any financial advisor . Faced with the ramifications of decisions they made decades before, clients can only ask that they not be surprised by unexpected costs and expenses.

But, there are surprises lurking for many seniors and their families who think they are prepared for retirement, but, haven’t understood just how expensive it can be. In fact, more than 70 percent of Americans over the age of 65 will need long-term health care services in retirement, according to the U.S. Department of Health and Human Services . Yet, according to the Employee Benefit Research Institute , only 13 percent of those who received professional home health care had long-term care insurance policies they can use to pay for growing out-of-pocket costs.

This gap in knowledge is a growing danger for your older clients and their families. States that have been stuck with long-term care bills are reacting with their own remedies: lawsuits and mandated claw-back actions against families who lacked the resources and the insurance policies to pay for care. With private nursing home room nearing $100,000 a year, according to insurer Genworth , and so few Americans ready to pay for it, it’s becoming a national crisis you have to talk to your clients about.

Related: Killing the Death Tax: How a Change in the Tax Law Impacts Life Insurance Sales

The gap between the perception of the golden years of retirement and reality of high costs means your clients have to consider all their available financial options to fund long-term care. That can include including selling a life insurance policy they might have bought to pass resources down to their heirs when they need the money now. Ironically, even if they somehow keep the policy in force, that money may never reach the heirs but be clawed back by the state to pay for their care.

Here are three key things people should know about alternative ways of covering long-term care and possible problems those can present down the road:

States can sue for Medicaid recovery of long-term care. Many families assume that once a senior is approved for Medicaid coverage of long-term care, the only thing left to worry about is maintaining financial and functional eligibility. You’ve proven that a loved one cannot afford the level of care they require, but that doesn’t mean there isn’t anything left to worry about in terms of covering and repaying costs. The Omnibus Budget Reconciliation Act of 1993 requires states to implement a Medicaid estate-recovery program, which allows states to sue families via probate court to recover Medicaid dollars spent on a family member’s long-term care. A report by the Office of the Inspector General showed that Medicaid, the primary source of long-term care coverage, recovers hundreds of millions of dollars from families every year. But, as budget pressures on states increase, estate-recovery actions are likely to become even more aggressive.

Watch out for withheld information on life insurance. Selling or borrowing against a life insurance policy in the secondary market, a process called a life settlement, is a way to help people find alternative funding sources for long-term care. A number of states have passed legislation mandating consumer disclosure about the secondary market before their policies would be allowed to lapse.

Be aware of filial responsibility laws. These impose a duty upon adult children for the support of their impoverished parents and can be extended to other relatives. These laws can include criminal penalties for adult children or close relatives who fail to provide for family members when challenged to do so. Attorneys for nursing homes are testing the laws by filing lawsuits on behalf of indigent parents to recover funds. Currently, 28 states and Puerto Rico have filial responsibility laws in place.

The message in all this is clear: the money for the skyrocketing cost of long-term care is going to come from somewhere. Your job is to find ways to insulate your clients as long as possible and prevent them from experiencing a financial surprise when they can least afford it.