People are living longer, which is good. But Americans’ increased longevity is creating new challenges. In addition, every day until 2030, 10,000 Baby Boomers will turn 65 and 7 out of 10 people will require long-term care (LTC) in their lifetime due to illness, injury, or a severe cognitive impairment, like Alzheimer’s.
Long-term care is a range of services and support for your personal care needs. Most long-term care isn’t medical care. Instead, it’s help with basic personal tasks known as Activities of Daily Living (ADLs). There are six basic ADLs: eating, bathing, getting dressed, toileting, transferring, and continence.
Long-term care is expensive and the costs continue to rise. If you need long-term care at some point in your life, you may incur significant expenses. It’s not uncommon for unplanned long-term care costs to wipe out retirement savings. It’s important to plan today how you might pay for care later.
How much does long-term care cost?
The cost of LTC care will vary based on the state you live and the type of care you receive. According to a 2019 Cost of Care Survey by Genworth Financial, below are average monthly costs nationwide:
- In-Home Care
- Homemaker Services $4,290
- Homemaker Health Aide $4,385
- Community and Assisted Living Facility
- Adult Day Health Care $1,625
- Private, One Bedroom $4,051
- Nursing Home Facility
- Semi-Private Room $7,513
- Private Room $8,517
As you can see, life in a nursing home is the most expensive. Nursing homes have the highest level of supervision and round-the-clock care.
How do I pay for long-term care services?
Standalone health insurance, basic life insurance, and disability insurance plans do not cover long-term care costs.
Medicare is the federal health insurance program designed primarily for people aged 65 and older. This program is funded by taxpayers, but you will pay a portion of costs when you start using Medicare. It can provide short-term nursing care.
Medicare will pay for services once the following conditions are met:
- You had a recent prior hospital stay of at least three days.
- You are admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay (not all facilities are Medicare-certified).
- You need skilled care such as physical therapy or skilled nursing services.
If you meet all of these conditions, Medicare will pay 100% of your costs for the first 20 days. For days 21-100, you pay your own expenses up to $170.50 per day and Medicare pays any balance. After 100 days, you are fully responsible for the entire cost of your care for each day you remain in a skilled nursing facility.
Medicare covers medically necessary care for acute care, such as doctor visits, drugs, and hospital stays. Medicare does not cover most long-term care costs.
Medigap plans are additional insurance plans you can buy to cover “gaps” not covered by Medicare. However, not even these policies pay for assisted living, Alzheimer’s, custodial (personal care), or adult day care. They can supplement nursing home care on a temporary basis and help with hospice coverage.
There are 10 different Medigap plans and each offers a different level of benefit and costs. Across the nation, the average monthly cost for a Medigap plan is under $200. Again, Medigap plans are great for covering overall medical bills, but won’t cover most long-term care costs.
Medicaid is a state run, health insurance program that pays for health care services for those with low incomes or very high medical bills relative to income and assets. Long-term care services can be covered through Medicaid. However, these services are only available to eligible individuals 65 and over, or younger if they are officially considered disabled.
When determining eligibility for Medicaid long-term care, each state considers an individual’s finances differently. In most states in 2019, an elderly individual must have monthly income of less than $2,313 and assets, not including their home, valued at less than $2,000. If an individual’s financial assets exceed the Medicaid eligibility requirement, but his or her income does not cover their long-term care costs, he or she is considered to be in the “Medicaid Gap.” In this situation, some seniors will “spend down” their assets on their long-term care costs (pay for their care costs out of pocket) until they become eligible.
Note: When spending down assets, individuals should not give them away or sell them under fair market value. Past asset transfers for up to five years preceding the application date are considered. This is called the Look-Back Period, and if violated, can lead to a period of Medicaid ineligibility.
It’s not uncommon for unplanned long-term care costs to wipe out retirement savings. It’s important to plan today how you might pay for care later.
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In exchange for a single payment or a series of payments, an insurance company will send you an annuity. With an annuity, the insurance company provides a series of regular payments over a specified and defined period of time. This income can be used however you wish, including for long-term care costs.
An annuity is a long-term, tax-deferred investment designed for retirement that will fluctuate in value. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet at least 59 ½ years old, you may also have to pay an additional 10 percent tax penalty on top of ordinary income taxes.
There are different types of annuities, but the one with least risk is a fixed annuity. With a fixed annuity, the focus is on safety of principal and stable investment returns. One feature includes a minimum interest rate guaranteed by the issuing insurance company. The fixed-rate annuity is very similar to a bank CD, but typically pays a higher minimum interest rate and offer greater security. You receive this amount no matter if the market goes down, interest rates decline, or the insurer has an unprofitable year.
Some insurance companies also offer a Long-Term Care fixed annuity which combines the benefits and features of a traditional fixed annuity with benefits for long-term care. If LTC benefits end up not being needed, the contract can be turned into income.
In certain cases, an individual may opt (or have no choice) to pay for long-term care with their own savings and assets. You may have enough personal savings and funds in your retirement accounts to pay for any and all retirement and long-term care needs. If not, many seniors apply for reverse mortgages.
A reverse mortgage is a special type of home equity loan that allows you to receive cash against the value of your home without selling it. In order to qualify for a reverse mortgage, you need to be at least 62 years old and the home must be your primary residence.
With a reverse mortgage, you can choose to receive a lump-sum payment, a monthly payment, or a line of credit. These funds can be used however you wish (yes, even on long-term care!) and as long as you spend the payments you receive in the month that you receive them, the money is not taxable and does not count towards income or affect Social Security or Medicare benefits. The reverse mortgage balance becomes due when you or the last borrower, usually the last remaining spouse, dies, sells, or permanently moves out of the home.
While reverse mortgages sound like a pretty nice setup, there are disadvantages.
- Taking out a reverse mortgage means spending a significant amount of the equity you’ve accumulated on interest and loan fees.
- Taking out a reverse mortgage means you likely won’t be passing down your house to your heirs, unless they want to pay off the loan balance.
- If you outlive your reverse mortgage proceeds, you risk running out of money.
- If your health declines to the point where you must relocate to a senior living facility, the loan must be repaid in full, since the home no longer qualifies as your primary residence.
- If you die while you have friends, relatives, or roommates living with you who are not on the loan paperwork, they likely will need to find a new place to live.
Before considering a reverse mortgage, assess your situation and first determine that downsizing to a more affordable home isn’t the better option.
Long-Term Care and Life Insurance Options
Insurance policies that would have long-term care benefits include:
- Long-term care insurance
- Life insurance with an LTC rider
- Hybrid insurance
Long-Term Care Insurance
Long-term care insurance (LTCi) covers many of the costs of a nursing home, assisted living, or in-home care—costs that aren’t covered by Medicare. With a long-term care insurance policy, you pay a premium and receive benefits when qualified expenses occur. If you are unable to perform any two of the six ADLs, or if you experience a severe cognitive impairment, you will qualify for benefits. Additionally, the condition must be expected to affect you for at least 90 days.
As beneficial as LTC insurance sounds, premiums have seen significant increases since 2000. LTC insurance premiums are determined by your age, health, and the benefits chosen. LTCi policies can vary in benefits and features which affect the premium pricing.
Jane Doe, a healthy 60-year-old woman, buys a long-term care insurance policy that costs $245 per month.
Her LTCi policy has the following features:
- Monthly benefit of $3000
- 90-day elimination period (number of days she has to wait until policy starts to pay benefits)
- 5 year benefit period (maximum amount of time benefits would be paid)
- 3% lifetime inflation protection
She will become eligible for benefits if she cannot do at least two out of the six activities of daily living (and limited as such for at least 90 days) or she is diagnosed with dementia or other cognitive impairment.
In addition, many insurance companies have actually been pulling out of the long-term care insurance market. Long-term care insurance claims cost the insurance company billions of dollars. In order to remain solvent, the companies raise premiums causing LTCi to be unaffordable for most. To meet the increasing long-term care needs of clients, insurance companies are instead offering LTC riders and hybrid products.
Life Insurance with a Long-Term Rider
A long-term care rider is an add-on for your life insurance policy. A long-term care rider allows you to use all or a portion of the policy’s death benefit for qualified long-term care expenses.
Combining life insurance with a long-term care rider may help:
- Keep you from having to liquidate your assets to pay for your long-term care services
- Reduce the impact on your family – both in providing care and easing the financial impact
- Preserve your independence by having funds to pay for in-home care
Jim Sparrow, a healthy 60-year-old man, buys a universal life insurance policy with a long-term care rider that has an annual cost of $4,874.
His policy has the following features:
- Death benefit of $300,000
- Maximum $6000 monthly long-term care benefit
- Option for flexible premiums payments
- Guaranteed annual interest rate of 2%
- 100-day elimination period
If you never need to use your LTC rider benefits, when you die your beneficiary will receive the full death benefit. If you do use the rider benefits, the death benefit is reduced dollar-for-dollar. If you have a permanent life insurance policy, its cash value is also reduced.
Hybrid Insurance Policy
Similar to buying a life insurance policy with an add-on long-term care rider, a hybrid product combines life insurance and long-term care insurance into one policy. However, the hybrid products do put more emphasis on the long-term care feature than the death benefit.
For hybrid products, some insurance companies even offer a 0-day elimination period before qualified LTC benefits can begin to pay out. Hybrid products generally have a more streamlined buying process as well because there are often less requirements, like lab work, versus when buying a life insurance policy with an LTC rider.
Alan Turner, a healthy 60-year-old man, buys a hybrid life insurance/long-term care policy. It requires annual payments of $11,222 for the first 10 years and then it’s paid-up.
His policy has the following features:
- Death benefit of $156,000
- Maximum $6000 monthly long-term care benefit
- $288,000 guaranteed LTC benefit available
- Minimum death benefit of $7,800 even if LTC benefits are exhausted
- 0-day elimination period
- 70% return of premium if policy is surrendered
If you never end up using any LTC benefits, when you die your beneficiary will receive the full death benefit. If you do use the LTC benefits, the death benefits are reduced. However, some hybrid policies guarantee a small percentage of the full death benefit even if you do exhaust all the LTC benefits.
Long-term care is expensive. There are many planning options. It’s important to understand how much your long-term care planning will cover if and when the need arises. It can be overwhelming. Work with a financial advisor if you’re unsure the best route for you. If you’re interested in using life insurance to enhance your long-term care planning, Quotacy can help. Contact us today for a free no-obligation life insurance quote.
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