Last week, we delved into the reasons to address the long-term care (LTC) need. This week, we’ll look at solutions to the LTC need. Let’s review a couple of basics first.
Long-term care is expensive. Nursing homes run $80,000 a year or more. People with few assets can’t really afford to insure against the cost of long-term care, while those with multiple millions of dollars saved may not need to, but probably should. The middle class is sandwiched in that place where both the cost of the problem and the cost of the solution are problematic.
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An LTC need can easily deplete someone’s savings. The greatest impact is to the survivors, whether that be a spouse or other financial dependents, or ultimately heirs. But you can't solve the problem by ignoring it — it tends to only get worse that way.
With approximately 70 percent of people over age 65 projected to need some form of LTC during their lifetimes, the odds simply aren’t conducive to an avoidance strategy. It’s a problem that needs to be addressed. Let’s look at the types of strategies available for dealing with Long-term care needs.
When to Start Preparations to Meet Long-Term Care Needs
Although LTC is generally associated with the elderly, the need should be addressed as early as possible. Generally speaking, your early 50s. Some people will require LTC before that, but that's a very low probability occurrence. There are two reasons to begin working on the problem at such a young age.
Barring anything great coming out of the government, your options decrease over time.
As people age, they begin to encounter health issues that preclude using insurance as a component of the solution.
The likelihood of being medically approved for an LTC insurance policy decreases with age. And some trust solutions need to be in place a significant period of time before they’re actually effective.
The cost of the solutions also increases over time. LTC insurance premiums are age-based: The older you are, the greater the premium. Meanwhile, trusts are written by lawyers, and their rates don’t seem to be going down, either.
It’s really a double-whammy: You have fewer options and they come at a higher cost the longer you wait. That’s why you shouldn’t wait.
The “Medicare Will Cover It” Fallacy
Medicare doesn't cover long-term care. Medicare does cover up to 100 days for medically necessary care in a skilled nursing facility. There are hoops to jump through, though, and while the first 20 days have no copay, your copay for days 21 through 100 is $170.50 per day.
Basically, you’ll need to have been being treated in a hospital and the doctors need to be sending you to a skilled nursing facility for continuing care. It can’t be a situation of you not being able to feed or clothe yourself — it has to be medically necessary.
From a planning perspective, this benefit doesn’t really enter into the equation. In addition to providing coverage for a very limited period, it doesn’t cover the most common need. It’s not something you can count on receiving.
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The Medicaid Option
Unlike Medicare, Medicaid is an option. Not necessarily a good one, but an option. Medicaid currently pays for the majority of nursing home expenses in the U.S. A major problem with Medicaid is that you need to be poor.
Medicaid dates back to the 1960s, when it was created as social medical insurance for poor people. If you’re not already poor, you would need to become poor to qualify. This is not an uncommon strategy. Sometimes it’s even intentional.
There is some variation from state to state for Medicaid qualification. If you’re single and spend down your assets, you’ll qualify when you have close to no assets left.
Congress recognized that for nursing home purposes, spending all the assets in order to qualify for Medicaid placed an undue burden on the non-nursing home spouse, so it created spousal impoverishment rules. These rules allow for the non-nursing home spouse to keep around $125,000 in assets plus a residence.
An additional issue is that Medicaid doesn’t see this as the government picking up the tab — Medicaid is supposed to try to get its money back once you die. It has the right to try to recoup its expenses by taking your house after your death but can’t kick out your spouse or kids to do so.
While becoming poor is definitely an option, most people wouldn’t want to lose their assets to do so.
Moving Assets to Become Poor
To make poverty more palatable, many people chose to move their assets rather than spend them down. This is typically accomplished via irrevocable trusts.
Transferring assets to an irrevocable trust removes them from your ownership, as they become owned by the trust instead. This makes it easier to qualify as “poor.”
But there are drawbacks. One problem is that Medicaid looks back five years and disallows transfers during that time from qualifying you for Medicaid. So it’s not a last-minute strategy.
Trusts also aren’t cheap. If you’re going this route, you should work with an experienced estate planning attorney. Attorneys aren’t inexpensive, but they’re necessary if this is what you want.
Another issue is how you presently own your assets. Most of the middle class accumulates the majority of their wealth in two pots: home equity and retirement plans. The home is readily transferrable into an irrevocable trust. Retirement plan assets are, however, more problematic.
When you take money out of a retirement plan, Uncle Sam wants his cut. Your retirement plan money can’t go from a retirement account into an irrevocable trust without coming out of its shell of being a retirement account.
Basically, you’d have to pay taxes on the money to move it. Now you’ve got a whole new problem, spending a great deal of your money in order to save it. Not an issue if all your money is in a taxable position. But that’s not the norm for the middle class.
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The Long-Term Care Insurance Solution
Long-term care insurance is expensive. Premiums depend on your age, where you live, the benefits you chose, and the insurance company. There are huge variations between companies for virtually identical coverage. And geography is a big consideration, especially if you have multiple residences. You may find the premiums where you winter to be vastly different from the premiums in the place where you summer. You have to shop carefully.
LTC insurance is usually based on a daily benefit amount. You get X dollars per day in benefits. For example, a policy could have a daily benefit of $200 per day.
It will have a waiting period, though. This is the period between when you first go into a facility and when they start to pay. Most policies have either 20-day or 100-day waiting periods, designed to coincide with Medicare rules.
You may or may not have a benefit increase clause, where your daily benefit increases each year by a specific amount. This is typically a percentage.
It can be a straight line, a percentage increase of the original benefit. In this case, the benefit would increase by an equal amount each year. Or the benefit could have a compounding increase, where it increases each year by a percentage of the prior year’s benefits.
The benefit period is also a big factor. You can have a set number of years of benefits, where the policy pays for your first three or five years or some other set amount of time in a nursing home. Or it can be a lifetime benefit, where the policy is designed to pay for however long you’re in a nursing home.
Additional benefits should also be a consideration.
Your policy should pay for at-home care as well as assisted-living facilities. Not all policies do so.
Let’s revisit geography from another perspective. You may have only one residence. This is the norm. But you might have children in several states, in which case, you might want to consider looking at the cost of care in other locations in comparison to your home state. Costs may be similar, but they can be dramatically different, as well.
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Putting It All Together
Now that you’re armed with some knowledge, it’s time to pull it together. At the lower end of the asset spectrum, insurance and trusts may be cost prohibitive, but there may still be steps to take. You need to consider the ownership of assets, especially the residence and other assets that aren’t in retirement accounts. You should do this in conjunction with someone knowledgeable in estate law in your state.
For those sandwiched into the middle class, there are choices to be made. You can transfer all of the risk to an insurance company in exchange for a very hefty premium. You can retain all the risk and risk losing everything. Or you can go somewhere in between. These are the same options the wealthy have, but they’re less likely to lose everything.
Some people insure for three years of nursing home care, figuring this covers the majority of nursing home stays. Other people elect for five years of nursing home care, figuring that if they move all the assets into a trust as soon as one of them goes into a nursing home, then they’ll qualify for Medicaid when the insurance runs out.
Two other strategies bear consideration. We talked about the tax problem of transferring assets from a retirement plan into a trust.
Often, dedicating just the income from the assets that would have been lost to taxes if you moved them to a trust will be sufficient funds to pay for LTC insurance. You keep the assets in a tax-favored position, but use the income to pay for LTC insurance to protect those assets. Not bad at all.
When looking at the range of risks that you can consider transferring to an insurance company, the benefit level is a consideration.
Perhaps you can absorb $50,000 (or some other number) per year of long-term care costs into your budget without going broke. You could then insure the difference and purchase a policy with a lower daily benefit, allowing you to maintain your principal, but pay for a portion of LTC costs out of pocket.
Preparing for Long-Term Care Needs: The Bottom Line
Whichever option seems best, this is a case where obtaining expert guidance is the prudent way to go. You have different state rules and costs within the framework of the federal system.
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Even if you’re going to insure all of the risk, you’ll still need some other documents in place, and you’ll need to go through ownership and beneficiary designations with someone who knows the laws in your state. You don’t have to go broke or even become poor to meet long-term care needs. But it requires some advance planning and action to use the best options available — while they’re still available.