November is Long-Term Care Awareness Month (or Long-Term Care Insurance Awareness Month, take your pick.) Either way it's a good time to talk about a subject that makes many of us uncomfortable - the increasing need for help we all face as we age.
This is part 4 of my posts on long-term care awareness and insurance. Previously I've written about general awareness, key terminology and types of care. Now it's time to write about planning to pay for the option to age with dignity that's best for you.
There are some challenges in planning for providing for our own care as we age. The first is the uncertainty around what our needs are actually going to be. Obviously if we knew what our needs were going to be we could plan for exactly the amount of money that we would need to be in exactly the right place to pay for exactly the right care at exactly the right time. Life unfortunately rarely works out that way and we should be thinking about financial planning for this care at least 15 years before we're likely to need it.
The next biggest risk behind needing care is actually paying for it. The good news is that are many sources of help available today that weren’t available even 30 years ago. The sources of care and assistance available to you may depend on your ability to pay for these services. Many people assume any care they need after age 65 is covered by Medicare, but that’s not true. Medicare is specifically to pay for medical care, and that may include some care in a rehabilitative facility, but it is time-limited and has restrictions on when it will apply. In most situations, for Medicare to cover care it must have arisen from an acute medical situation (think hospitalization) and your condition must be expected to improve. After the first couple of weeks, you also have some out-of-pockets costs and after a couple of months your benefits may end, regardless of your ongoing needs. At that point, you are likely to fall into one of three categories financially:
You are eligible for Medicaid (usually this means having very little income and not much money).
You have enough money that you can afford to pay as much as $150,000 or more per year for whatever care you need.
You can’t qualify for Medicaid and don’t have enough money to pay for all of the care you need.
If you’re in the third category, you may benefit from transferring some or all your risk to someone else, namely an insurance company.
While we are all likely to need some help as we age, the cost of that risk ranges from relatively small (such as weekly housekeeping and 8-12 hours/week of homemaker services) to significant enough to be potentially catastrophic (several years of 24/7 care, either at home or in a nursing home type of setting.) There are only four things you can do about any risk: avoid it, retain it, share it or transfer it. We can try to avoid the risk of needing to pay for help to age-in-place by staying as healthy as we can, but we all know people who have done everything “right” and still need help.
Retaining the risk means setting aside enough money before needing help. This may seem like the simplest choice but is the most difficult and possibly the least efficient. It's difficult because accumulating the amount of money necessary to pay for the maximum amount of care we might need is daunting, and we probably have other goals we want to fund. For example, based on the current cost of a semi-private room in a nursing home in the NY metropolitan area* a 50 year old would have to save more than $27,000 per year until they were 65 to have enough to pay for 3 years in a nursing home when they are 80.** Someone starting to save at age 40 would still need to save nearly $11,000 per year to accumulate enough for long-term care.*** It’s not efficient because for every dollar you want to put into your long-term care account, you will most likely have to earn between $1.19 and $1.74, depending on your total tax bracket.****
Next to consider are ways to share and/or transfer the risk. This means incurring a smaller known cost with certainty in exchange for someone else taking on the risk of covering a significantly larger but unknown and uncertain cost. One way to transfer the risk is to plan on making yourself eligible for Medicaid to pay for whatever care you may need. According to the American Council on Aging, in 2023, to be eligible for Medicaid to pay for either institutional or home care, an individual must have income below $1677 per month and have assets under $30,180.***** If you have more than $30k in assets, you would need to transfer them to an irrevocable Asset Protection Trust at least 5 years before you apply for Medicaid. (IRA assets cannot be transferred to an Asset Protection Trust unless they are first withdrawn from the IRA and taxed.) You should assume Medicaid will require you to make withdrawals from a retirement account based on your life expectancy. You would need to forfeit all income more than the limit (currently $1677) including the IRA withdrawals. If you have assets and/or income more than these levels, you should consider working with a Certified Financial Planner®, a Geriatric Case Manager with experience in Medicaid applications and an Elder Law Attorney to discuss your options and strategies for planning to be Medicaid eligible if and when you need any kind of long-term care.
The more common option for transferring the risk of paying for care is to purchase some sort of insurance that will help cover the costs of care you are likely to need in the future. In the past, there was only traditional long-term care insurance to consider; now there are several other options that may suit your needs. Let’s talk about the different types.
Keep in mind there are certain tax credits that may be available when you are paying premiums for long-term care insurance. There are specific definitions of what types of coverage qualify for these credits, and eligible products will most likely make it clear that it is eligible for the credit. Your eligibility can be affected by your age and income, so consult your tax preparer for more information about your specific situation.
If you are over age 65, you may also be able to pay your premiums from a Health Savings Account using pre-tax dollars. Speak with your Certified Financial Planner® regarding your eligibility for a Health Savings Account.
Traditional Long-erm Care Insurance is the most direct way to transfer the risk of paying for care to a third party, namely an insurance company. You pay a premium, in exchange for a pre-determined amount of coverage on either a daily or monthly basis. There can definitely be sticker shock when looking at long term care insurance premiums. These are complex products and there are various features of long term care insurance that can help you best allocate your premium dollars.
I have a detailed example of some of the variables in buying a long-term care insurance policy HERE.
You may be hesitant to buy a traditional long-term care policy because the premium feels like a lot of money to spend on something you think you may not use. There are some other choices of products offered by insurance companies that can provide you with access to funds if you need care, and some other sort of benefit if you don’t. The landscape is constantly changing as insurance companies evolve what risk-transfer options to offer consumers. I won’t go into tremendous details here on every choice but will give you a general idea of some of the most popular. Please consider consulting a Certified Financial Planner® who will help you explore the options available in your state, and help you determine the best option for your circumstances.
Insurance companies have begun offering riders on life insurance policies and annuities that will provide cash to help with long-term care expenses if necessary. A life insurance policy rider will typically allow you to decide when you first buy the policy what percentage of the death benefit you may access monthly to cover expenses for care if needed. These are not called “long-term care insurance” (LTCi) because there are certain standard definitions for LTCi because of tax benefits that these riders don’t meet. The eligibility to access the rider’s benefit is usually the same as the eligibility criteria for traditional LTCi and will also usually include a “terminal illness” qualification. For example, you could purchase a $250,000 life insurance policy with a 4% Chronic Care rider. If you meet the criteria (such as needing
significant assistance with at least 2 ADLs) you can get a cash payment of up to $10,000 per month to cover your costs. In most policies, this is a way to access death benefits early, so after 25 months the benefits are depleted, and when you die there is no life insurance paid to your beneficiaries. I have recently heard of some policies that are being offered with at least some residual death benefit, in exchange for a smaller percentage available monthly. Of course, you need to be able to qualify for life insurance in order to use these products. Again, please consider speaking with a Certified Financial Planner® who will help you explore the options available in your state.
Annuities are insurance products that can provide lifetime income, and I have seen some policies that will double the monthly income on annuitized contracts if you need to go into a nursing home. These policies are not available in every state and are not offered by every company. There are also single-premium deferred annuity contracts that will provide a multiple of what you have deposited if you need long term care. Annuities generally do not have any kind of medical underwriting, and if you have health issues an annuity may be your best, or even only option to transfer at least some of your expense risk to an insurance company.
Thousands of Baby Boomers are still turning 65 every day, and Gen Xers are about to start turning 60. It may not be too late if you’re a Boomer, and if you are a Gen Xer, now is definitely the time for you to start thinking about providing for your independence as you age-in-place. As always, I encourage you to work with a Certified Financial Planner® who can help you assess your needs and resources and introduce you to other qualified professionals with access to solutions that are appropriate for you and your specific circumstances.
**Based on current cost of semi-private room, forecasted value in 30 years assuming 5% compound increase in costs, 3 years of expenses, earning 7% on saved capital, save annually for 15 years and then allow to reinvest and accumulate for another 15 years.
***Based on planning to pay for 3 years of residential care at age 80, based on the current cost of semi-private room, forecasted value in 30 years assuming 5% compound increase in costs, 3 years of expenses, earning 7% on saved capital, save annually for 25 years and then allow to reinvest and accumulate for another 15 years.
****Based on a minimum marginal federal tax bracket of 12% and a NY tax bracket of 4%, and a maximum federal marginal tax bracket of 37% and a NY tax bracket of 6%.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.