When Paying for Long-Term Care, You’ve Only Got 4 Options
They all have pros and cons, so which option is best for you? Don’t wait until you need care to think it through.
When we talk to people about the importance of planning for long-term care, the most common response we get is, “It’s not going to happen to me,” or, “I’m not going to live in a nursing home.”
But the reality is a long-term care event in your life is quite possible, and the definition of long-term care is broader than living in a nursing home. Basically, it means needing assistance with two or more of your six activities of daily living (bathing, continence, dressing, eating, toileting and transferring). Statistically, according to the U.S. Administration on Aging, 70% of people over age 65 will need some type of long-term care over their lifetimes.
So, for people who think it’s not going to happen to them, the odds say differently. Therefore, it’s important for people to take into consideration the cost of long-term care and how they’re going to manage that risk.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Unfortunately, health insurance and Medicare don’t cover long-term care expenses. Medicaid will, but only for lower-income Americans. Long-term care is expensive, and the price is continually going up. According to Genworth’s annual Cost of Care Survey, the cost for facility and in-home services rose an average of 1.88% to 3.8% annually from 2004 to 2020. In 2020, the survey showed that the median yearly cost of a private room in a nursing home in the U.S. was $105,850; an assisted living facility ran $51,600; a home care health aide was $54,912.
These are the four choices one can make in managing long-term care risk:
Self-insure
Basically, this means you have enough assets so that if you or your spouse incurs a long-term care event, the money is available to cover those expenses out of pocket. Just realize that if you’re spending down your assets to cover a long-term care event, there will be less, if any, remaining to accomplish your legacy goals. The cost of care can be significant. On average, men will need just under three years of care and women will need just under four years of care. For those needing care due to a cognitive impairment (dementia, Alzheimer’s, etc.) the length of time that care will be needed can be considerably longer. With the national average cost of a home health aide or assisted living facility hovering over $50,000 per year, the cost of long-term care can easily exceed several hundred thousand dollars.
Rely on friends and family
For some families, this is a great choice. Maybe the children have bought a home with a second master bedroom on the main floor, so when their parents get to the age when they can’t take care of themselves, they can move into that main floor and the children will be there to take care of them. If relying on your friends and family is your way of managing that risk, I would strongly suggest you talk with them and let them know what your wishes are.
Rely on Medicaid
One of the challenges with relying on Medicaid is you pretty much have to be impoverished to qualify for assistance. Although it varies by state, if you’re single you’d need an income of less than about $2,400 per month and typically only $2,000 in countable assets.
Another challenge is that if Medicaid is paying your bills, it will be dictating the type of care you get and who you get it from. A comment we hear from people is they want to leave the house, and/or other valuable assets, behind to their children. If you end up needing Medicaid assistance, Medicaid will come after your estate after you die and try to get repaid, which means that the house you tried to leave to your children will have to be sold (in most states). Medicaid will have to be paid back, and your children may not get much of anything.
If Medicaid is your choice, you need to be proactive and work with an attorney who’s familiar with Medicaid laws that can protect the assets you want to pass on. And you need to get those protections at least five years prior to going on Medicaid assistance. Medicaid has a five-year look-back period, and here’s the basics of how it works:
- Medicaid has an asset or resource limit for those who apply.
- Medicaid’s look-back period is intended to prevent applicants from giving away assets in an attempt to meet the asset limit.
- All asset transfers within the five-year window are reviewed, and if the rule was violated, a penalty period is established. During this penalty period, a person who would normally qualify for Medicaid would be unable to receive benefits.
- However, if one gifts or transfers assets prior to the five-year window, there is no penalty.
Purchase an insurance product
You can do this in various ways – a traditional long-term care policy; a form of life insurance with an accelerated benefits rider; or a hybrid long-term care policy that is a combination of life insurance and long-term care insurance.
Traditional insurance: With traditional long-term care insurance, one disadvantage is that your premiums are not locked in — meaning they can rise over the years, sometimes significantly — and if you cancel the policy, you lose all the premiums you paid in. Most people buy long-term care insurance when they’re in their late 50s and 60s. We typically don’t need to use those policies until we’re in our 80s, which means we’re setting ourselves up for making premium payments, which could increase for potentially 20 years or more. When you purchase the policy, it may be affordable, but 10 to 15 years down the road you may get to the point where you no longer want to make premium payments or can’t afford to.
Life insurance with an accelerated benefits rider: If legacy is important to you, and you have a need for the death benefit, then a life insurance policy with an accelerated benefits rider may be a good option. It allows you to borrow against the death benefit tax-free to cover long-term care expenses. And then when you pass away, whomever you named as beneficiary gets a tax-free death benefit.
A hybrid long-term care policy: With a hybrid policy, your premium and benefits are guaranteed and known up front. You can choose to make one premium payment and be done, or spread your premium payments out over a three-year, five-year, seven-year or 10-year period. Typically, any time after your premium is paid in full, you have the option to cancel the policy and get all of your money back. If you’re lucky and you never have to use the long-term care benefits, then everything is leveraged up and gets passed on tax-free to your named heirs. Because it’s a hybrid policy, even if you use all the long-term care benefits, when you pass away there will still be a tax-free death benefit that gets paid out to your named beneficiaries.
The data shows that we’re living longer, and that as we get older, we start to deteriorate. It pays off to proactively position money so that you have the assets, if and when, you require long-term care.
Dan Dunkin contributed to this article.
Disclaimer
LTC (Long Term Care) rider may require an additional fee and LTC (Long Term Care) riders are subject to eligibility requirements. The information and opinions contained in this material have been provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. Our firm is not affiliated with the U.S. government or the federal Medicare program.
Disclaimer
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Eric Lahaie (www.jehmwealth.com) is co-owner and co-founder, with his wife, Jennifer Lahaie, of JEHM Wealth & Retirement. He holds the RICP® (Retirement Income Certified Professional) designation and can offer both insurance and securities products. Additionally, he holds the Certified Fund Specialist (CFS®) designation.
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Want to Give Money to Your Adult Children? 10 Things You Should Know
It’s less taxing to give money to your adult children than you might think. A good plan can help you avoid certain pitfalls — and drama.
By Jeremy Greenfield Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Five Keys to Retirement Planning and Peace of Mind
Long, worry-free retirements don't just happen. You have to make them happen. The good news is that it may not be as hard as you think.
By Josh Leonard, Investment Adviser Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published