Is Long-Term Care Insurance Right for You?
Picture this. You're older and retired. You've worked for years to build up a nice financial nest egg for yourself and your family. Your home is paid off, you're out of debt, and you're able to spend quality time doing the things you love doing on your own terms. Basically, you're living your dream life.
But after a while you find your health deteriorating and you're unable to perform most of the things people don't think twice about like feeding yourself, bathing, and moving around easily. You find yourself needing daily nursing care or, if it's really serious, you need to transfer to a nursing home. What do you do and what kind of an impact does this have on your finances?
Well, to start off, you need to realize that your situation isn't unique. It's been reported that among people turning 65 today, approximately 70% are expected to need some type of long-term care, according to the U.S. Department of Health and Human Services. That's millions of people across the country who are in the same boat you're in.
Next, as many people are coming to realize, the cost of skilled home care and nursing home care isn't cheap and it's only getting more expensive. It's been estimated that the average lifetime cost of these services is a staggering $172,000! That's money that you were planning for your retirement budget or to leave to your children and grandchildren.
So, what are your options? Well, you do have a few (which we'll talk about later) but let's get started looking into whether or not a good Long Term Care Insurance Policy would help you out.
What is Long Term Care Insurance?
In a nutshell, Long Term Care (LTC) Insurance (also sometimes called nursing home insurance) is a way to pay for in-home care, adult day care, assisted living, or a nursing home. One of the major downsides of it, however, is that it's sometimes crazy expensive. Also, many times it provides only limited benefits that may end up covering only a small percentage of your total long-term care costs. On the plus side, it can make your life easier on a daily basis.
Long Term Care Insurance kicks in when you have a cognitive impairment or you're unable to perform two activities of daily living, commonly called ADLs. These activities include eating, bathing, getting dressed, using the toilet, remaining continent (in control of your bowels), and being able to get in or out of a bed or a chair. Having someone around to help you take care of these activities can make your physical life a whole lot easier and having the ability to pay for that help can take a huge load off your mind.
Now, a few other details about this type of insurance you should be aware of is that you need to be considered eligible to receive the benefits by the insurance company and most policies include an elimination period. This is where you're responsible for long-term care costs incurred before the insurance kicks in. It's basically your deductible and for most policies it covers the first 30 to 90 days you're receiving the care.
Another thing you need to know is how much of your care costs the policy covers. Here's an example:
You buy an insurance policy that provides $4,000 to $6,000 per month in coverage. It comes with a guarantee that the coverage amount will rise 3% annually to cover inflation and will last for the next three years. After that, your coverage ends. Anything over this amount, you're responsible for and after the coverage lapses, you're on your own financially.
All that being said, having a good Long Term Care Insurance policy isn't a perfect solution, but it can make your life a whole lot easier physically, mentally, and financially.
So, Who is LTC Insurance Right For?
To answer this question, you first need to understand the primary reason for purchasing a policy. You see LTC Insurance is mainly used for those who have assets they want to protect from being drained to pay the cost of the medical care. Policies can be expensive, especially if you wait until your 50s or 60s to purchase one. At that time in life, you're older and you may be facing some pre-existing medical conditions which will drastically affect the premiums, if you can find a company to insure you at all
There are generally two types of people who don't need LTC Insurance. On one end of the financial spectrum you have those with very few assets; no house and not a whole lot of money to protect. For those individuals, Medicaid can pay for the cost of their long term care. On the other end of the spectrum you have the wealthy. These are people with at least $2 million to $3 million in assets who can usually afford to pay for care out of their own pockets.
The dilemma comes for those in between—neither poor nor wealthy. For some people, such as those who have assets worth $400,000 to $500,000 above and beyond the value of their homes, LTC insurance may be a sound idea. This is particularly true if they view the insurance as a safety net rather than as a financial investment. One thing many people in this category worry about is having to sell their homes to pay the cost of their long term care. They may have lived in their homes for decades and the thought of losing it to pay for their care is heartbreaking.
How Much Coverage Do I Need?
According to a recent study by the National Care Planning Council, the average stay in a nursing home is 835 days and even for those who are eventually discharged for short-term rehab care, the average stay is 270 days. That's around nine months of daily care!
According to Genworth's Cost of Care Survey from 2020 (Genworth is one of the leading long-term care insurance companies), on average in the United States, a private room in a nursing home costs $8,365 per month, or $275 a day. For a semi-private room, the average cost of a nursing home is $7,441 per month, or $245 a day.
So, if you do the math, if you want a private room in a nursing home and you're only going to be staying for a relatively short-term of nine months, it's going to cost you an average of around $75,000. And that's if you have a medical condition that's going to go away after a while so that you can return home.
If you use the 835 day stay at $275 per day for a private room, the cost of your stay will set you back a cool $229,625! (Only $204,575 for a semi-private room with a roommate.)
Remember that this example is for nursing home stay and not for home health care. If you need long term care but can stay at home, the cost will be much, much lower and you may never need long-term care insurance at all in many cases.
Having sticker shock yet? If so, you may be able to take advantage of one or more of the following options which can be less hard on your budget.
What are My Other Options?
Purchasing an LTC Insurance policy isn't your only option when it comes to paying for your long-term care needs. Here are a other few options you may be able to explore depending on your situation.
A Life Insurance Policy With a Long-Term Care Rider
You can look into purchasing a life insurance policy with a rider that allows you to use the death benefit while you're still alive in the event you qualify for long-term care. The beauty of this hybrid tool is that if you don't use the long-term care benefit within the policy, your heirs or favorite charity can receive the life insurance death benefit instead of the 'use it or lose it' scenario that a traditional long-term care insurance policy offers. This way you get what you pay for either way instead of paying for something you may never use.
A Health Savings Account
Health savings accounts (HSAs) are like personal savings accounts but the money in them can only be used to pay for health care expenses. Unlike many employer sponsored health plans, you and not your employer or insurance company, own and control the money in your HSA. This money rolls over from year to year and withdrawals are tax-free if used for qualified health care expenses, including long-term care and long-term care insurance premiums.
Veteran Benefits
The Veterans Administration has extensive long-term care options for veterans who have served in qualified periods of conflict, as well as their spouses. To get the services you must have a clinical need for it and the service must be available in your location.
The Veterans Administration website (VA.Gov) has extensive information covering long-term care coverage for veterans including residential settings and nursing homes, adult day health care, respite care, and skilled home health care.
An Annuity
An annuity is a contract between you and an insurance company that works like this. You make a lump-sum payment or series of payments in exchange for receiving regular disbursements (beginning either immediately or at some point in the future) which in many cases lasts for the rest of your life.
The Annuity payments can be used to pay for long-term care and the contracts can be issued up to age 80, don't require a medical exam, and have fewer questions than long-term care insurance policies. This makes it ideal for those who may not be able to obtain a long-term care insurance policy due to poor health.
Save Money for Long-Term Care
If you're a saver and have a large nest egg or a significant pension set aside, you might be able to pay for long-term care yourself. One of the nice things about this option is that if you don't end up needing the care, you don't spend years paying the premiums on an LTC Insurance policy you never use. The downside is that you run the risk of running out of money if you end up having very expensive health care needs over an extended period of time.
If you end up spending down all of your savings, you might qualify for Medicaid coverage which pays for long-term care for low income retirees (we'll cover that below) but that isn't always a great option.
Medicaid
When all other options are exhausted, the government will help pay long-term care costs, but not in the way many people expect. They're confusing Medicare with Medicaid.
A lot of people think Medicare will pay for all of their long-term care needs but that just isn't the case. While Medicare will pay for some nursing home care after a hospitalization, that coverage is limited and after 100 days, you're totally on your own.
However, Medicaid will pay ongoing long-term care needs … but only if you're close to being broke. Its catch is that you first have to deplete almost all your financial resources before you qualify for coverage. Medicaid eligibility varies by state, but typically you can't have more than $2,000 in liquid assets (a.k.a. cash in the bank).
While many states exclude one vehicle, your home, and small life insurance policies from their Medicaid eligibility criteria while you're living, after you pass away many estate recovery laws allow for these assets to be seized to reimburse the government for the cost of your care. That means there's a good chance nothing will be left to pass on to your family after you're gone.
The Medicaid Spend-Down Problem
So, what do you do if you have a good amount of money in the bank or investments, you're living in a nice house, and you want to leave something for your family after you're gone? Well, you need to follow Medicaid's spend-down rules and get rid of or spend the money before you can qualify for coverage, and that's sometimes easier said than done.
Medicaid has a five-year look back period. That means that they'll look back over the previous five years to see if you've given away assets just so you can qualify for coverage. This includes houses, cars, and other assets you're looking to exclude from their rules. If you've done this within the previous five years, they'll either deny you coverage or delay the start date for the coverage until after you've 'spent' the value of the assets on medical or nursing home care even though you don't own them anymore.
One clever solution to the Medicaid Spend-Down rules is setting up an Irrevocable Medicaid Trust. The assets you put into the trust won't be counted for Medicaid eligibility as long as neither you nor your spouse has direct access to them or is named as the trustee for the trust. The beauty of this solution is that, since the assets are held by the trust instead of you, the government doesn't count them for qualification purposes. So, you can still live in your house, drive your own car, and leave them to your family after you pass away. One thing to keep in mind, however, is that you need to set this all up at least five years before you attempt to sign up for Medicaid since you'll still fall under the five-year spend-down rules.
Putting it all Together
Regardless of how you plan to pay for long-term care, it's a good idea to think ahead, write down your wishes, and share them with your family. Having everyone on the same page when it comes to this important part of your life can prevent damage to your family relationships and the stress which comes with them grappling with how to take care of an ailing loved one. Do your research, figure out your options, and create a game plan. Remember, ignorance is expensive and no one cares more about your money than you do.
Thanks for reading!
Steve
