Planning for long-term care is no easy task. First there is the cost. The median annual cost of long-term care varies by state, but can be in the six figures depending on where you live - see the chart below. How long someone will need care poses a quandary too. Some may never need care, some may need only a year or two, while those with dementia may need care for a prolonged time period. If only you know what your future looks like, it would make planning easier! Since that is not possible, we can only work with what we know.
What we know is long-term care is expensive today and if history is any guide will only increase in cost. We also know people are living longer thanks to breakthroughs in technology and medicine. These two factors - living longer and costing more - make planning for long-term care even more important for retirees. So how do you plan for future long-term care expenses? There are three options.
Government Programs - Medicare/Medicaid
Medicare does not cover long-term care or "custodial care" which is help with daily living activities such as bathing, eating, or dressing. Only in very limited circumstances will Medicare pay for a short-term stay in a skilled nursing facility, if the care is related to a hospital stay, such as rehab from a serious injury or a stroke. Even then, Medicare only covers a portion of the cost for up to 100 days in a skilled nursing facility .
Medicaid does pay for long-term care, however you have to meet certain income and asset tests. There is also a 5 year look back for gifts you made. Relying on Medicaid can be problematic. First, many nursing facilities only have a certain number of beds available for Medicaid recipients. You may not get the home or room you hoped for. Secondly, we don't know for sure what Medicaid will look like in the future. By the time you need care, politicians can change Medicaid's eligibility criteria or the amount of benefits received.
Government programs were meant to be a last resort option for senior citizens, to keep them out of poverty. But government programs are unreliable in my opinion, and I advise my clients not to leave the care for their future self to chance. In other words, be careful about expecting to use Medicaid for long-term care - the laws can change plus the number of Medicaid beds at a home may be limited.
Be careful about expecting to use Medicaid for long-term care - the laws can change plus the number of Medicaid beds at a home may be limited.
Self-insuring is nothing more than using one's own savings to pay for long-term care. While this may be an option for some, self-insuring poses two main concerns:
- The problem with self-insuring long-term care is it may use up a substantial portion of your savings. The worst-case scenario is a prolonged need for care, which would substantially reduce your nest egg. There is a risk your surviving spouse may not have enough money for care. Also, many older clients I speak to want the kids to inherit the money rather than spending down on medical care.
- Is self-insuring the best use of your money? Self-insuring means you are paying for long-term care dollar-for-dollar. If you buy insurance, you are leveraging your money or increasing your buying power so in fact you may only be spending 80 cents on the dollar via the insurance benefit to pay for care depending on your age.
Long-term Care Insurance
Transferring the risk of long-term care expenses to an insurance company helps maintain your nest egg for the surviving spouse and children while at the same time can make good financial sense. Long-term care insurance creates an immediate pool of money for care that otherwise would have taken several years of saving and investing. There are several options to purchasing some protection:
- Hybrid life insurance policy - Uses a life insurance chassis but mainly set up to provide long-term care benefits. These policies feature a guaranteed premium you can spread out over 10 years and usually provide a return on your money if you use the long-term care rider of 6-8% depending on the age you access the benefits. Hybrid policies usually have a 70-80% return of premium if you never use the long-term care rider. There is also a death benefit. There are many types of hybrid policies and each carrier has it's own terms and conditions, so it's best to work with an experienced agent.
- Traditional long-term care - is a pay-per year policy, usually for life or till you need care. These policies provide the most benefit, but have two drawbacks: 1. The premium is not guaranteed and can increase 2. It is a lose it or use benefit - if you never use the coverage there is no refund of premium.
- Whole life with a long-term care rider - This is a neat option for those wanting life insurance first but don't mind spending a little extra for the long-term care rider. The long-term care rider is generally inexpensive and allows the insured to use the death benefit while alive for long-term care expenses without incurring a loan.
Start planning early. Procrastinating only means fewer and more expensive options in the future.
Start planning early. Procrastinating only means fewer and more expensive options in the future. I typically recommend some mix of insurance and self-insuring. This provides a layer of protection if the savings run out, but also helps keep the insurance cost down by taking on some of the risk.
For more information or if you would like to see a long-term care insurance quote, feel free to email me. If requesting a long-term care insurance quote, please include your date of birth and a general description of your health.
Michael Aloi is a fee-based Certified Financial Planner™, Practitioner with 20 years of experience. He has a Master's Degree in Personal Financial Planning and is an Accredited Wealth Management Advisor℠.