When Paying for Long-Term Care, You’ve Only Got 4 Options

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.

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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.