LTC is not cheap and costs vary depending on the type of care needed.
Adult day care is less expensive than assisted living, which is less expensive than nursing home care. On the low end, an adult day care center might cost $35,000 per year and on the other end of the spectrum, a nursing home may cost over $100,000. Remember that LTC expenses are new expenses that are in addition to the existing cost of living. In other words, just because you have a long term care expense doesn’t mean your other expenses vanish.
For example, an adult day care center may cost $35,000 a year and will provide three meals per day. While it’s true that without the adult day care, you’d be paying for and providing these meals yourself, the actual savings by having the day care center provide the meals represent less than $4,000 a year. The remaining $31,000 is a new expense. Even if you move into an assisted living residence or nursing home full time, you may very well have other ongoing expenses. The problem is magnified if one spouse requires LTC and the other spouse remains at home with a mortgage, homeowner association dues, utility bills, and so on. Do not make the mistake of thinking you will reduce your current expenses when considering the cost of LTC.
There are three ways to pay for LTC:
- out of pocket
- with government dollars
- or with an insurance policy.
What are the benefits and problems inherent in each method, and how can you create the best LTC strategy for you and your family?
Pay for Long-Term Care Yourself
It is impossible to know if you will need LTC or for how long. LTC statistics can be misleading and I would not rely on averages in creating a plan. For every person who manages to avoid LTC, there is another one who will need it.
Paying for all of your LTC yourself is a dangerous plan. A LTC event can quickly decimate your financial resources. It doesn’t take long paying $75,000 a year to burn through an entire retirement nest egg. A family’s life savings will vanish twice as fast if both spouses require extended LTC. Approximately 90% of people entering a nursing home will deplete their assets within four months.
If you are determined to pay for LTC yourself but do not have enough income, there are alternative strategies. If your house comprises most of your assets and you are 62 or older, you may qualify for a reverse mortgage. A reverse mortgage allows you to tap into the equity of your residence by receiving a monthly check for as long as you live in your home. The size of the check is determined by the value of your home, current interest rates, and ages of its resident-owners. This monthly check may be all it takes to pay for home health care services. This strategy works best when all other assets have been depleted.
Self-funding your LTC is only a good strategy if you manage to avoid LTC. Yet it is impossible to guarantee that you will not need care. If you have less than $250,000 in assets, it may make more sense to self-insure against the chance of LTC. Before you make this decision though, I encourage you to first talk to a financial professional.
Have the Government Pay for Your Long-Term Care
Most people believe that Medicare and Medicaid will pay for their LTC. Medicare covers the cost if you are not poor and Medicaid if you are. I’ll save you a lot of time by saying the government is not in the business of providing long-term care and that you shouldn’t count on them for paying for your long-term care.
Long-Term Care Insurance
LTC insurance is the best way to pay for LTC. Like any insurance policy, you hope you never need it. LTC insurance provides a solution to a real problem. You have a much greater chance of using your LTC policy than other policies you would never go without:
- The odds of incurring property damage or bodily injury at home and using your homeowner’s insurance are 1 in 88 according to “Long-Term Care Insurance: A Product for Today,” Journal of the American Society of CLU & ChFC.
- The odds of using your auto insurance are 1 in 248 according to The Road to Wealth by Suze Orman.
- The chances of needing fire insurance are 1 in 1,200 according to The Road to Wealth by Suze Orman.
- The odds of needing your LTC insurance policy are 1 in 2 according to the article “Baby Boomers Need to Plan for Their Future” by the American Health Care Association!
How Does a Long-Term Care Policy Work?
The first significant difference in a LTC insurance policy is that the “benefit” is expressed in dollars of coverage per day. Other insurance policies like auto or homeowners pay a flat dollar amount. Your homeowner’s policy may cover up to $350,000. In contrast, LTC insurance may pay $150 per day. There are also policies that accumulate unused LTC benefits.
This distinction in daily coverage is important because if you have a three month stay in a nursing home that costs $200 a day when you have policy that pays $150 a day, you will be required to pay $4,500 out of pocket (90 days x $50 = $4,500). Conversely, you could have a 30-year stay in a nursing home that costs $150 a day and not be out of pocket anything. LTC costs vary dramatically from state to state and even from city to city. This is why it is imperative you know how much LTC costs in your area. A slight miscalculation can cost you thousands of dollars per year.
The second thing different with a LTC insurance policy is how these policies determine when you are eligible for LTC. This problem isn’t found in other insurance policies. If you smash your car into a tree, your house burns down, or you break your arm, no insurance policy will claim you are not eligible for a claim. While it is normally an easy decision for other insurance policies, it is much more difficult to determine when someone actually needs LTC. For example, if someone cannot bath themselves, do they need some form of LTC? What if they just need help cooking and cleaning? What if they need help taking medications? What if they need just need supervision? Should the insurance company cover all of these claims?
Insurance companies defined six activities of daily living (ADL) to standardize the needs of LTC. ADLs are a fancy term for those things most of us do throughout the day without thinking about it. In the first hour of the morning, you probably zipped through all six ADLs:
1) Transferring – Getting out of bed
2) Continence – Controlling bowel and bladder functions
3) Toileting – Using the toilet
4) Bathing – Taking a shower
5) Dressing – Putting on clothes
6) Eating – Having a bowl of cereal and a cup of coffee (Note that this ADL only includes the physical act of eating and does not include preparing the food.)
Certain states, including California, include a seventh ADL for some LTC policies:
7) Ambulation – Walking throughout your home and outside your residence
ADLs are important because they are how insurance companies determine if they will pay for your LTC. Most insurance policies will cover your LTC if you are unable to perform at least two ADLs or have an impairment of cognitive ability. You may find a policy that will provide benefits when you can’t perform just one ADL. These policies will be discussed later in the chapter.
For example, if you cannot get into or out of bed by yourself and cannot bathe, your LTC policy would provide coverage since you can’t perform two of the ADLs—transferring and bathing. However, if you just have trouble eating, your insurance policy would not cover your LTC bills since you can perform all but one of the ADLs.
The third difference between LTC insurance and other forms of insurance is that LTC policies are divided into two types, tax-qualified (TQ) and non-tax-qualified (NTQ). Which type you own can make a difference in when you are covered, how your benefits are taxed, and if your premium payments are tax-deductible.
TQ policies were conceived in August of 1996 as part of the Health Insurance Portability and Accountability Act (HIPAA). Prior to this Act, there was just one kind of LTC policy.
The HIPAA law provided rules for a TQ LTC policy.
- Uses a standard and consistent definition of the six ADLs;
- Defines a LTC need when a policyholder is unable to perform at least two ADLs or has a severe cognitive impairment;
- Requires a licensed health-care practitioner to certify that the policyholder will need help with at least two of the ADLs for at least 90 days; and
- Provides a 30-day money back guarantee (also called a “free-look” period).
If a LTC policy conforms to these and a few other restrictions, the policyholder gets certain “benefits.” These benefits may or may not be worthwhile, but can include the deduction of LTC premiums from income tax, not considering LTC reimbursement as taxable income, and state tax credits or deductions.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.