How to Pay for Long-Term Care

How to Pay for Long-Term Care

If you’re like the majority of retirees, you are probably worried about your future health whether that’s simply needing help in your later years or Alzheimer’s. And there is a good chance that your worrying is well-placed as according to AARP, approximately 52% of people who turn 65 today will require some sort of long-term care (LTC).

Not surprisingly, women are more likely than men to need care (58% vs 47%). Women also need care longer than men on average — 2.5 years vs 1.5 years.

If this has you concerned and curious, you’ve likely also thought about how you might pay for this type of care if and when you need the help. Long-term care is a scary proposition. It’s scary because it means a decline in health to the point that you need assistance. It’s scary because of what it might mean for your spouse’s lifestyle. And it’s scary because it’s really, really expensive.

The first two concerns are without question important, but all you can do is prepare yourself mentally for this possibility if it should come along. At least with the third issue, paying for it, there are actions you can take to prepare. And that’s what I’m going to focus on here.

Let’s start by shedding some light on what the costs actually are. According to LongTermCare.gov, below are some national average costs for LTC in the United States:

$225 a day or $6,844 per month ($82,128 per year) for a semi-private room in a nursing home

$253 a day or $7,698 per month ($92,376 per year) for a private room in a nursing home

$119 a day or $3,628 per month ($43,536 per year) for care in an assisted living facility (for a one-bedroom unit)

**I converted the monthly figure into an annual figure to emphasize the potential financial impact this can have over extended periods.

If you are interested in learning what the potential costs are in your specific area, LTC insurance provider Genworth Financial has been conducting a Cost of Care Survey for the past 15 years that you can use to really narrow down the potential costs where you live. Here is a link to the survey where you can establish some estimates in your area.

There is quite a bit of confusion surrounding how someone might pay for LTC as well as the default options that many retirees find themselves subjected to. Let’s get to it.

How to Pay For Long-Term Care

In general, there are four primary ways to pay for LTC.

  1. Insurance-Based Coverage
  2. Self-Funded
  3. Medicaid
  4. Family Care

Let’s expand on each of these individually.

1. Insurance-Based Coverage

The world of insurance is wide-ranging, so I am going to expand on the three primary insurance-based solutions that are available to offset the cost of care.

A. Traditional Long-Term Care Insurance

For those that aren’t up to speed as to what LTC insurance is, it is a stand-alone policy that is specifically purchased to offset the cost of long-term care if/when a need arises. This type of policy is typically a “use it or lose it” type of policy. Meaning, if you don’t use the policy during your lifetime, you lose the premiums you paid. This can cause many potential buyers to consider other options. But I think, generally speaking, this is the wrong way to look at it.

Think about your car insurance — you don’t drive around in your car saying to yourself, “Boy, I hope I get in an accident today so that all the premiums I’ve paid to this point don’t go to waste.” On the contrary, you’d probably be happy if you weren’t in a car accident for the rest of your life. Why would dealing with an LTC scenario be any different? When posed in that manner, we recognize that it is a silly way of looking at it, but the perception persists.

Additionally, in recent years, many prominent providers have either exited the LTC business entirely or have raised rates considerably. This has caused many existing policyholders to re-evaluate whether they should continue holding the policy or cut their losses. It’s not a fun proposition to be sure. And given the amount of press surrounding the rate increases, this issue alone has also caused many potential applicants to look at other options as well.

I intend to write a future post about the long-term future of LTC insurance as a viable solution, but I have to do more research on the topic before I can reliably state my opinion on the matter.

I will provide one perspective though for people that purchased policies years ago: Observationally, most of the policies I’ve looked at are still providing ample bang for the buck despite many of the substantial rate increases. So, I would encourage anyone that has a policy that is more than a few years old to do a thorough evaluation before “cutting their losses.”

From the perspective of the overall benefits of an LTC policy though, there are still tremendous benefits. An LTC policy can provide significant leverage when considering the protection of your assets. Meaning, you can pay pennies to protect dollars because of the automatic “cost of care increases”(inflation protection) many policies provide that allow your policy benefits to grow over time.

Secondly, if you purchase a partnership approved plan in your state, you can actually provide ultimate protection for your spouse as it can protect the sum total of policy benefits paid in liquid assets while becoming eligible for Medicaid benefits.

For example, if your policy paid out $400,000 in benefits (not unusual in policies with shared benefits), you would become eligible for Medicaid once your liquid assets reach the $400,000 threshold as opposed to impoverishment. This helpful feature allows your surviving spouse to retain liquid assets to provide for their future income. Find more information on the partnership benefits here.

Long story short, the future is a little hazy on LTC insurance, but the benefits can still be significant.

B. Life Insurance With LTC Benefits

Consumers who find the potential “use it or lose it” issue of traditional LTC coverage to be unnerving might find the idea of life insurance with LTC benefits of greater interest. In the case of life insurance with LTC benefits, it’s easiest to think of this product in terms of “live, quit or die.” Frankly, I don’t like that phrase, but it is effective at explaining your options. If you live and need LTC, you can use the policy for that need. If you quit (cancel the policy), you can get some or perhaps even all of your money back. Or if you die, your heirs can receive the death benefit. One way or another the policy pays out. This provides a bit of comfort to those that are worried about potentially wasting their premium dollars.

You can’t have your cake and eat it too though. It’s important to note that you would not receive the same dollar for dollar leverage as the traditional LTC coverage discussed above, but it can provide an antidote for the “use it or lose it” issue.

This type of life insurance with LTC benefits generally comes in two types: Hybrid Long-Term Care and Life Insurance with Long-Term Care riders.

Hybrid Long-Term Care Policies

Hybrid LTC is likely to provide more of a long-term care benefit – meaning it will provide minimal life insurance but greater long-term care benefits than would be available with a higher death benefit. If the purpose of purchasing this type of policy is the LTC benefits, then this is likely the best option for you. This type of policy often includes some inflationary protection.

Life Insurance with Long-Term Care Riders

Life Insurance with LTC riders are primarily used to provide a life insurance death benefit, but include an “Accelerated Benefit Rider” or “Chronic Illness Rider”. These riders generally allow you to access part of your death benefit for LTC purposes should you meet certain eligibility requirements. Generally speaking, this type of policy does not offer inflationary protection.

C. Annuities with Long-Term Care Benefits

Last week, I wrote a piece about annuities in retirement and how I believe they fit into a typical retirement plan. In it, I noted that many annuities offer “riders” (add-on benefits available for purchase) and providing some type of long-term care benefit is one of the riders most commonly seen.

One example of an annuity LTC benefit would be the insurance company’s offering to double the income the annuity is providing in the instance of an LTC occurrence, sometimes called a “double indemnity rider.”

It’s my opinion that annuities should be a last-resort if looking for LTC protection. I would really only consider this if you need the additional guaranteed income and are set on obtaining some sort of LTC protection but are ineligible due to health underwriting for one of the above insurance options.

2. Self-Funded Or Self-Insured

This is pretty straightforward but is likely only a financially viable solution for those that are in the top 5% of the investing public.

Self-funded or self-insured is when you plan to pay for the total cost of your care out of your own net-worth by liquidating investments, home equity, and/or bank accounts. If you do not have sufficient investments, this can invariably lead to effectively bankrupting yourself. Making matters worse, if you have a spouse that survives your care, they could be financially destitute for the remainder of their life. I don’t say this to cause fear, but simply to state that long-term care is expensive – there is no way around that.

And I say it that clearly because I think it’s important to note what the real possibility of impoverishment could mean for your spouse. Virtually any spouse is going to pay whatever it takes to ensure proper care, and this is often to the future detriment of themselves. Think about it – if you spend all your money providing caring for yourself, what is your surviving spouse likely to have left after the fact?

As I stated above, if you’ve planned appropriately, this may very well be an option for you, but if you think there is any chance of running out of money with a rose-colored glasses view of retirement, then this will almost certainly be a major concern you should consider.

3. Medicaid

For those that are unaware, Medicaid (not Medicare) is the government’s program for those who are unable to pay to care for themselves. Let’s call it what it is; it’s welfare. The government will assess your income and asset levels to determine eligibility for Medicaid. Essentially, you have to impoverish yourself before you are eligible for Medicaid. Typically, seniors cannot have more than $2,000 in liquid assets. As such, this is often a last resort.

Additionally, if you’re looking for any sort of control with regard to your care or the care of someone you love, Medicaid is not a viable solution. Since you would be on the government’s dime, Medicaid facilities typically are not as nice as those provided by private care and you cannot control the location of the care provided. This could be a reasonable distance from your family, which would cause your loved ones increased time and money to visit. Not ideal.

4. Family

Unfortunately, regardless of wealth or lack thereof, the family tends to the default option for many people. This is unfortunate. We inherently know that this is a strong possibility, even statistically likely, and yet few families have this conversation with their family. Most of the time, this type of event is thrust upon a family with little notice and the people that love us most are often the ones picking up the pieces.

I’ve personally been there. I shared a little about my story with my grandfather before, but I’ve participated, albeit for a very short period of time, in caring for someone that I loved deeply. (One of the great honors of my life.) Along those lines, I want to mention one thing with regard to caring for my grandfather.

At the time, I was a perfectly capable, strong (by most any standard), 31-year-old guy. I say this because there is no shortage of men or women that say they can take care of their respective spouse if the time comes. What about when they fall down? I’ve been the one picking up about 200 pounds of dead weight. It is not easy. And I know for a fact that he would have laid there for much longer had I not been there because my grandmother certainly was not capable of getting him up. So, if this is your plan, I would strenuously consider finding alternative ideas.

Have a Plan

Regardless of the strategies you choose, it is important to have a plan. Beyond choosing how you might pay, consider designating a trusted family member or individual with your best interest in mind as your financial power of attorney can help to manage your affairs if you are unable. It’s important to educate this person with regard to your financial situation as well as your personal wishes so they can make informed and confident decisions on your behalf.

The point of this post isn’t to convince you of what you should do or what might be the right strategy for you — that’s much too personal for a blog post. What I am hoping for is simply to spur the conversation as this is something that impacts most couples at some point in their life and there is real value in having this discussion before, not after, it becomes real life. And inform every one that could be directly impacted by your decision.

Nobody likes having their life turned upside down without any prior preparation. Having this simple, though tough, conversation may work wonders in your overall planning since everyone will be clear on their roles. It can also help keep the family together since (hopefully) no one is pointing fingers at another.

Lastly, having a plan that includes, hopefully, some combination of options #1 and #2 above, can actually allow your family members to participate and love on you far more than any of the other options. When the finances are stretched thin and everyone is doing everything they can to provide for your physical care, they often are not as able to spend that time loving on you and appreciating the time you have left as much as you might hope they should or could. Having a plan can actually allow them the freedom to love on you rather than having to physically care for you.

No matter which option you feel is best for you or what you may be forced into, consider what each of these options means for your spouse and family. Having a conversation is step number one. I hope this helps in your planning.

Related Reading: 75 Must-Know Statistics About Long-Term Care: 2018 Edition

What I’ve Been Reading:

NON-FINANCIAL:

A Great Tribute to Jack Bogle, the Founder of Vanguard (philly.com) – If you were going to pick one article to read this week, please choose this one!

Here’s To Your Health In Retirement (lovebeingretired.com)

Ranking Vegetables by How Healthy They Are (melmagazine.com)

Are Smartphones Necessary Anymore? (calnewport.com)

The Future of Work For People 50+ Will Surprise You (forbes.com)

FINANCIAL:

How Long Should You Keep Various Financial Documents (humbledollar.com)

11 Tax Deductions You Can Still Take (morningstar.com)

Diversification is Almost Undefeated (awealthofcommonsense.com)

Thanks for reading!
Ashby Daniels

If you’re looking for a retirement planner to help you make a comfortable transition into retirement and want to see if we’re a good fit, reach out to me and my team at Shorebridge Wealth Management.

Disclaimers: Gurantees are based on the claims paying ability of the inssuing company. Long Term Care Insurance or Asset Based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59.5, may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.

These policies have exclusions and/or limitations. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.

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