You may have never though of this, but it only takes one year of paying for custodial long term care to wipe out a significant portion (if not all) of the retirement assets that took you decades to accumulate.
New studies by the National Association of Health Underwriters and Medicare have suggested that more than 70% of all retirees who live to 65 years of age will need some form of long term care in retirement. That number is simply staggering.
The main reason for that is, people are living longer. Modern medical science has become quite good at keeping us alive longer.
The problem is, there’s a difference between living longer, and living well isn’t there?
With this being the case, I’m shocked at how many of my Medicare clients I talk to who have absolutely no game-plan when it comes to financing their long term care needs.
Many of my clients are extremely concerned with Medicare (and rightfully so), but pay little attention to the other half of their retiree health insurance, which is Long Term Care.
I think this is because facing the possibility of needing help with bathing, eating, and doing simple activities of daily living is something that most people simply don’t want to think about, and therefore they have no plan in place for when it actually happens. Honestly, I can’t blame people sometimes. Who wants to sit around and plan for their own demise?
What people fail to realize though is the impact that their long term care needs will have on other people, like their children, family and friends. We’ll talk more about this in a minute. If you don’t want to plan for yourself, at least plan for the people you love.
An Urban Institute study has shown that the cost of long term care is the leading cause of financial ruin and even complete impoverishment during retirement.
My wife Kristen is a Geriatric Practitioner. She’s worked in long term care facilities for over 10 years and the stories she comes home with sometimes are just absolutely depressing. It’s not just the impact on the patient, but on their families also. This is why it is crucial to have a plan in place, so when the time comes you are fully prepared.
A common Long Term Care oversight
When people think of long term care, they generally assume it’s for the elderly only, but that’s not case. Your health situation could change overnight. You could be involved in an auto accident tomorrow and need around-the-clock care for the rest of your life. This is why it’s crucial to have a game plan.
Long term care concerns are not just for retirees and the elderly.
Notice how I’m not necessarily saying that you need long term care insurance? I’m using the term, game-plan.
This is because a traditional long term care insurance policy is only one way to pay for long term care needs. In recent years, insurance premiums have been extremely volatile, in particular in traditional long term care policies. This has deterred many consumers from properly protecting themselves.
Don’t worry though, because there is more than one way to skin a cat. In this article we’ll be going over the 8 different ways to pay for long term needs.
First, I want to dispel a common myth that has to do with Medicare and Long Term Care.
In meetings with many of my Medicare clients, they often assume that Medicare covers long term care in some way. This is in part why I’m writing this article. I want folks to understand exactly how it works.
How does Medicare cover Long Term Care?
Regardless of whether you receive care in your home or in a long term care residence or facility, Medicare does not cover true custodial care (long term care). It also doesn’t cover nursing home expenses.
In other words, if you had to hire someone like an aide or nurse to come to your home a few days a week, or every day, and help you with activities of daily living, like bathing, feeding yourself, getting in and out of bed, getting around town, and getting dressed, Medicare does not cover this.
What Medicare does cover is some skilled nursing. Medicare may pay for up to 100 days of care in a skilled nursing facility per benefit period — 100 percent for the first 20 days (after a three-day hospital stay, provided skilled care is needed). Then, for days 21–100, Medicare requires a co-payment. To help cover the co-payment, many seniors also have a Medicare supplement insurance policy. In general, once Medicare stops paying for care, the supplement payment also will end.
Here is a quick video that will explain this further.
Many people I meet with completely underestimate the cost of healthcare and long term care in retirement. This is because a large majority of them are either misinformed, or in denial about ever really needing to receive long term care.
Many people assume they will either pass away before needing care, or that a family member or child will be able to care for them if they need long term care. This is not only an irresponsible way of looking at the situation, but it’s unrealistic.
Don’t hide your head in the sand, pretending it won’t happen to you. The only thing that has a higher likely hood than you needing long term care, is you passing away. That may seem a bit harsh, but unfortunately 70% of retirees will need some form of long term care during their retirement.
It is absolutely critical to have a conversation with someone like myself, who specializes in healthcare planning in retirement, to come up with a game-plan on how you can cover the costs of long term care. I meet so many people who are so concerned with the cost of their Medigap policy, but yet completely ignore long term care coverage which likely at some point will have a far greater impact on their finances during retirement.
Failing to plan is planning to fail and I have seen first hand in working with retirement planners all day, retirement assets crippled and families destroyed by lack of planning, and all out refusal to address long term care costs while in retirement.
I’d say at least once a month, we have people coming in to our office to meet with one of our financial advisers, who are in absolute crisis mode because their parent fell ill and they had no game plan in place.
So with that in mind, let’s take the first baby step together in understanding how to pay for long term care. We’re going to go through the 8 ways to pay for your long term care game plan.
Here’s a quick snapshot of what’ we’ll be covering:
Paying out of pocket
Traditional Long Term Care Insurance
Life Insurance cash value + 1035 Exchange
Single Premium Immediate Annuity
Asset Based Long Term Care
Let’s talk about the first option now.
1.) Paying for long term care yourself: How much does it cost?
According to the 2014 Cost of Care Survey done by Genworth Financial, the cost of having a non-skilled home healthcare aide come into your home just 5 hours per day, 5 days a week to help with activities of daily living is roughly $25,000 per year. This is a 1.59% increase over the 2013 cost, with the five year growth in cost right around 1.32%.
The cost of living in an assisted living facility in a one bedroom unit is going to cost you about $42,000 per year.
The cost of living an a nursing home, in a semi-private room, with around the clock care is going to cost $76,000 per year.
What’s even more discouraging, when you factor in the average annual 4% inflation, in 18 years by the time you may very well need long term care, that $76,000 is going to be more like $152,000!
This means that paying for long term care out of pocket requires a considerable amount of readily available liquid assets, that are free of any type of withdraw penalty, or negative taxation.
It also exposes you to losing a large chunk of the retirement assets that took you decades to accumulate.
Keep in mind that long term care costs are one of the most catastrophic expenses you could ever pay for. In other words, it won’t take long to deplete most if not all of your liquid assets if you are forced to pay for a long term care situation.
An example to reference is Ronald Reagan, who required long term care for over a decade.
For many retirees who are living on a fixed income, with Social Security and maybe a pension or 401k, self-funding is simply not an option.
2.) Relying on Medicaid to pay for long term care
Medicaid is the financially troubled federal and state joint welfare program for the poor. In order to qualify for Medicaid to pay for your long term care, you basically have to be impoverished, having less than $2,000 in total assets.
What’s more, you can only receive your care from Medicaid approved facilities and aides. Medicaid has been known to deliver marginal quality of care at best, and the extend of it’s services are very limited compared to that of a traditional long term care program or facility.
In most states Medicaid only covers nursing homes, so there is no guarantee that you can stay in your home if relying on Medicaid to cover your long term care.
3.) Getting help from children or friends to pay for or provide long term care
As I mentioned earlier, a lot of people assume that their children or relatives will help them get by when they get to the point of needing long term care.
If you’ve ever been in a care giving position, you know the financial and emotional stress it can cause. You know the impact it can have on your career, children, marriage, relationships with siblings and other family members, as well as outside interests, hobbies, and stress relief outlets.
It can have such an impact on things that counseling services have been curated to help care givers deal with the daily stress of caring for a loved one. An example of one of these services is www.caregiverstress.com.
If you haven’t been in that situation, ask one of your friends who are in their 50’s or 60’s and they’ll tell you about the sleepless nights, and stress involved with figuring out ways to pay for and take care of their aging parent or loved one.
I remember a good friend of mine whose grandmother had moved in with him and his family when she was getting older and frail. I had always wondered why I had never been invited over, and when I finally had the chance to go inside, I realized why. The entire dining room had been converted into a bedroom for his grandmother. It almost looked like a hospital room, complete with a sheet hanging from the door way so no one could see the person inside.
While providing care to loved ones is certainly an act of compassion, placing the burden of care on spouses, children and other family members can create a significant financial, physical and emotional strain on loved ones, and one that you surely would like to avoid.
4.) Traditional Long Term Care Insurance
By incorporating long term care insurance into your financial plan, you are not only protecting your assets that you’ve worked so hard to accumulate, but you are reducing the burden of care that would otherwise fall on family members, and maybe most importantly, you are enabling yourself to receive care in the setting you most prefer, like your own home.
Regardless of whether you decide to purchase traditional long term care insurance, or self-insure, waiting to address your long term care needs until the point of needing such care will significantly impact your financial situation, as well as your quality of life and your ability to maintain your independence.
If you wait too late to purchase long term care, you’re risking the chance of paying a much higher premium, or worse, not being able to qualify due to poor health.
In a recent study by Princeton Survey Research Associates International, where 1000 adults were interviewed, they found that a majority of the respondents admitted to not knowing much about long term care insurance.
53% of those surveyed said they are “not too familiar” with long-term care insurance, and 26% said they are “not at all familiar.” Only 5% of the interviewees already have long-term care insurance.
56% over-estimated the cost of long term care insurance, with the average guess being over $7000 per year for a traditional policy for a healthy 55 year old couple.
However, according to the American Association for Long-Term Care Insurance, the actual average cost per year is $2,700 for a healthy 55 year old couple.
You’re probably paying more for your homeowners and auto insurance premiums, and there is a far less likely hood of incurring a catastrophic financial loss in that area, whereas you stand a 70% chance of needing long term care!
There is an old saying, “penny wise and pound foolish”.
With that said, the most common objection to traditional policies is that you could go 10 years or more paying the annual premiums, and die suddenly, never getting a chance to use the benefits you were paying for. Well, that’s insurance for you. It’s really no different than any other kind of insurance in that you have to lose to win. Same goes for life, health, homeowners, auto, and any other insurance policy.
On the contrary, even if you are paying $5,000 per year for 10 years (which is on the high side for a long term care policy), which of course after 10 years would be $50,000 in insurance premiums, it takes just 3-18 months of receiving benefits to completely recoup a lifetime of premiums. So, if you do need to collect on your benefits, the premium is money well spent.
Protecting your Children
Long Term Care insurance can be the best gift you can ever give to your children and family. Yes, I just said gift. If you go back to #3 you’ll see just how stressful it can be to take care of an aging loved on. Long Term Care insurance enables your children and family to care about you, instead of caring for you.
As I mentioned before, my wife tells me stories all the time of children who are just waiting for their parent to pass away, so they can both be relieved from the situation. It sounds incredibly selfish and downright mean, but this is a reality for many people who are forced to take care of an aging loved one.
The best time to buy long term care insurance is as early as possible. The earlier you buy it, the lower the premium will be — much lower. If you have a family history of diseases, that’s extra incentive to get long term care sooner rather than later while you’re still healthy enough to qualify.
I know people who are in their 30’s who own long term care insurance. The annual premium is often less expensive that what they pay for one month of health insurance!
Women and Long Term Care Insurance
Another point to keep in mind is the particular need for long term care insurance for women. Have you ever been in a nursing home or assisted living facility? Ever notice how most of the residents are women? This is because women generally outlive men, and unfortunately are left to take care of themselves after their husbands pass.
What’s more, prior to their spouse passing, women are typically the primary caregiver should their husbands need long term care and this can create an incredible strain, often times forcing the women into a nursing home themselves shortly after the passing of their spouse.
It’s also important to understand that if you or your spouse do not have long term care insurance, you’re still going to be paying for your every day routine living expenses on top of the out-of-pocket long term care costs for caring for your spouse.
Hopefully you see that it doesn’t take long to burn through an entire lifetime of savings in a relatively short period of time.
5.) 1035 Exchange with Whole Life Insurance cash value
Do you have an old life insurance policy laying around with a lot of cash value in it? Depending on how much cash value you have in your policy, you may be able to fund a long term care insurance policy without coming out of your pocket.
This is possible by doing a 1035 Exchange. That way this works is you surrender/liquidate the cash value in the life insurance policy, and do a tax-free exchange, transferring it to a new life insurance policy with a long term care rider, or, a new long term care policy.
Depending on how much cash value you have, you may be able to pay the long term care premiums with out having to come out of your pocket.
6.) Reverse Mortgage
In certain situations, doing a reverse mortgage could be a great way to pay for your long term care. What’s great about reverse mortgages is you’re able to stay and receive care in your home, and the deed is still in your name. By doing a reverse mortgage you are essentially pulling the equity out of your house, which is then distributed back to you in a non-taxable, fixed monthly payment, which can then be used to pay for long term care premiums.
Understand that reverse mortgages are not for every one. Typically a reverse mortgage is suitable for someone who doesn’t have many other assets to use to pay for long term care.
You also need to be at least 62 years old to qualify.
7.) S.P.I.A. (Single Premium Immediate Annuity)
This is a strategy that more and more retirees have been utilizing due to the low interest rate environment we live in these days.
Here’s how it works:
You take an un-productive asset like a low yield CD (what CD isn’t low yield these days right?), or money market account and use it to purchase an Single Premium Immediate Annuity (a.k.a. S.P.I.A.). The income stream generated by the annuity is then used to pay for long term care, whether out of pocket or a traditional long term care policy.
Example: John is a 65 year old man who wants to buy long term care insurance. Based on his age and benefit needs, Johns annual premium for a traditional long term care policy is $4,000 per year. John decides to purchase a S.P.I.A. and moves $100,000 that’s been laying around in various CD’s and money market accounts earning little to no interest, and uses that money to purchase a S.P.I.A.
Based on the lifetime annual income generated by the annuity, John would receive a monthly payment of $7200 for the rest of his life. John uses this payment to cover the pay for the long term care premiums, and still has $3200 per month left over that he can use on other living expenses or reinvestment.
Note, you do not need $100,000 to benefit from this strategy.
8.) Asset Based Long Term Care (ABLTC)
In the market today we have some very innovative combination products, and this concept takes full advantage of them.
If you ask me, this is the best strategy going right now for a variety of reasons. ABLTC leverages annuities or life insurance as the foundation for long term care protection.
Here’s how it works:
The concept here is that if you end up not needing long term care benefits because you die before needing them, your unused long term care premiums are not wasted like they would be in a traditional policy. Instead, they are distributed to your beneficiary(s) as a leveraged death benefit, income tax free.
Let’s first talk about the mechanics of the annuity. They way the annuity works is, by leveraging an investment portfolio held by the insurance or annuity company, it triples the value of the annuity for any long term care needs. In other words, if you put $60,000 into an ABLTC annuity, the long term care benefit is automatically $180,000. Pretty neat right?
This type of product gives you all the same benefits of a traditional fixed annuity, but in addition, will provide a daily long term care benefit should you need it that will last for 6 years. It does this by drawing from a long term care fund which is built into the annuity, enabling you to take tax-free withdraws from this fund to pay for long term care costs.
At your death, any value left over in the annuity will be passed along to your beneficiary(s).
Now let’s talk about a ABLTC life insurance product with a long term care rider. The ways this works is you take tax-free withdraws from the death benefit while you’re still living to pay for long term care.
So suppose you purchase this type of life insurance policy, and it has a $300,000 death benefit. With this type of product you can access up to 96% of the death benefit over 4 years to pay for long term care. So based on this example, that equates to $72,000 per year to pay for long term care.
Any death benefit left over is passed to your beneficiary tax-free, just like regular life insurance. Not that difficult to understand right?
So whether it’s an annuity or life insurance product, the concept here is very flexible, in particular with the annuity, as you are leveraging the insurance company for extra long term care dollars.
We just covered a lot of information. I would recommend if you have time, to actually re-read this article at least once.
If you take away anything from this article, take away these three things:
The cost of long term care can be financially crippling, not just for you, but for your children and family members if you allow it to be
You have a lot of options when it comes to paying for long term care.
Do not take advice from unqualified people. Take the time to sit down with an independent adviser like myself, who specializes in retiree health care planning, and get some good solid advice that will help you come up with a game plan before it’s too late. Everyone’s situation is unique.
If you are confused on what you should do about your long term care needs contact us and we would be happy to help in any way I can —no strings attached.
Even if you already have a game-plan in place, it never hurts to re-evaluate it. You could be paying premiums for traditional long term care insurance and not even need to. We can help you figure that all out.
Also, feel free to leave me a comment or question below in the comment area and I’ll get back to you asap.