For many retirees, the term "long-term care" is typically associated with a nursing home. As we age, there is a greater chance we will need some sort of long-term care in the future. According to the U.S. Department of Health and Human Services, 70% of people over 65 will need long-term care at some point in their lives.
The worst part is that many will not (or do not want) to discuss the need to plan until it is possibly too late. The good news is that you have many options, but you might need to get a little creative. Take one of my clients, as an example. Fifteen years ago, at age 60, she had purchased long-term care insurance policy, and over the years had paid about $45,000 in premiums for a $7,600-a-month long-term care benefit with a 90-day deductible (known as an "elimination period"). The policy had a five-year limit, for a total payout possibility of $456,000.
Now, at age 75, she was worried about the rising cost of her insurance coverage as well the possibility that she would never use the policy, getting nothing for all the money she paid on premiums. She had $200,000 in a bank CD that she didn't need for her living expenses, so we came up with an alternative plan. She ditched her old long-term care plan and used the $200,000 to replace it with an $8,800 monthly long-term care benefit with a 0-day elimination period for four years (a $422,000 total payout). On top of that, if she never uses the benefit, her kids would receive a $211,000 death benefit (a return of her deposit and minimal interest).
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So, how can you prepare for long-term care costs? Here are six options:
1. Self-pay
The most obvious choice, but it comes with a hefty price tag. A Genworth Cost of Care Survey conducted in June 2017 revealed the national median for the following services:
- Home health aide services: up 6.17% to $21.50/hour
- Homemaker services: up 4.75% to $21/hour
- Adult day health care services: up 2.94% to $70/day
- Assisted living facilities: up 3.36% to $123/day or $3,750/month
- Semi-private room nursing home care: up 4.44% to $235/day or $7,148/month
- Private room nursing home care: up 5.50% to $267/day or $8,121/month.
Due to higher labor costs and stricter laws, expenses have and will continue to increase. Even though care received at home is more affordable than in a nursing home, you can never anticipate future needs.
2. Government benefits
Many retirees think that Medicare will pay for their long-term care. Unfortunately, this is not true and often one of the biggest misconceptions. Although Medicare covers some home and nursing home care, it is only for rehabilitation purposes and not categorized as long-term.
If you're a veteran, there is a pension with aid and attendance available. The amounts are contingent on if you're: single (up to $1,830 per month); married (up to $2,170 per month); or a surviving spouse of a veteran (up to $1,176 per month). There are certain conditions that need to be met, such as proof of service and a doctor's evaluation, in order to receive the benefit.
Retirees can also pursue their state-run Medicaid program to cover long-term care expenses. But qualifying for Medicaid is not easy since it is based on federal poverty guidelines. If you're single, depending on the state in which you live, the income limit is around $2,000 per month, and your assets (excluding the value of your home and vehicle) can't exceed around $2,000. Married couples can have assets as high as $120,900. Make sure to use an elder law attorney with experience if you decide to pursue this route.
Planning for long-term care through government benefits can be a challenging task, especially for couples.
3. Traditional long-term care insurance
This choice has been around for decades but is no longer as cost-effective as it once was. For a retiree choosing to purchase traditional long-term care insurance today, it may lead to regret in the future. Why? With rising policy premiums and stricter state reserve requirements, there aren't a plethora of insurance companies to choose from anymore.
In addition, unless a return-of-premium rider was purchased in the past—a feature not offered on newer policies—your traditional long-term care insurance policy would have no value today if it lapses or you pass away.
4. Combined life insurance with long-term care benefits
One option retirees are using is a combined life insurance policy with long-term care benefits (also known as a "rider"). Not only are there similar features available (e.g., inflation protection and different elimination periods to choose from), but if you pass away prematurely, your beneficiaries receive a tax-free death benefit.
The biggest difference you should be aware of is whether the policy has either a chronic illness or long-term care rider. A competent financial adviser well-versed in long-term care will know the difference between both.
5. Combined annuity with long-term care benefits
Similar to aforementioned, a combined annuity with long-term care benefits might offer a higher dollar amount or more lenient underwriting in lieu of a tax-free death benefit.
Currently offered by a select few insurance companies, the key is to make sure it is classified as long-term care. Some financial advisers are selling annuity policies with a double benefit (also known as a "home health care doubler") that pay at the most a maximum of five years and are not deemed long-term care.
6. Life settlement
If you have an existing life insurance policy—whether term or permanent—legally it is an asset with ownership rights. Life insurance policies contain some sort of value that often goes unrecognized. In fact, you might allow your life insurance to lapse because it's no longer needed, but could've converted it into a long-term care benefit. Many retirees, including one of my own clients, are using their existing life insurance policies as collateral to fund their future long-term care needs.
My 76-year-old client had a life insurance policy with a $1.2 million death benefit on which he was paying $35,000 in annual premiums. The policy had very minimal cash value, and he was contemplating letting it lapse. By using a Medicaid life settlement, he was able to exchange his life insurance policy for about $350,000 worth of long-term care to pay for home health, assisted living or nursing home expenses in the future.
It's never too early to plan for long-term care, so make sure to include it as part of your financial plan in retirement.
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