Long-Term Care Expense: More Solutions Than Ever. Procrastination Still the Biggest Hurdle.
If there ever was a topic that most people procrastinate over, or simply ignore the issue until it’s too late, it’s the need to address the costs of long-term care. I get it, there are so many things that have our attention now, the idea of making sure our money is protected from the high monthly costs of living in a nursing home seems like something that can wait until tomorrow. For most of us, it can.
It’s not surprising though how tomorrow has a way of turning into 20 years and 5 years too late. In the United States, the number one payer for long-term care costs is Medicaid. This means the bill for most folks in a nursing home is paid by and through Medicaid. So what is the big deal? Why not put long-term care costs out of sight and out of mind and just let Medicaid pay for it if, or when you need it. Honestly, that is most people’s plan. And if that is your plan there is nothing wrong with that, just make sure you realized what needs to occur before you qualify for Medicaid.
According to Genworth's Cost of Care Survey, on average in the United States, a private room in a nursing home costs $8,365 per month, or $275 a day. For a semi-private room, the average cost of a nursing home is $7,441 per month, or $245 a day. These costs could escalate rapidly for special needs clients such as dementia patients. Based on the average cost for a semi-private room a three year stay in a nursing home would drain your estate value by $268,000. What if your spouse needed care as well? In order to qualify for Medicaid, you would need to spend your assets down to $2,000. Once you have drained your savings and investments down to $2,000, the government says that is enough pain and allows Medicaid to kick in. Draining your assets to $2,000 is one strategy, but in my experience, it is not the outcome most people would choose if they could go back in time.
Earlier I made the comment, “It’s not surprising how tomorrow has a way of turning into 20 years and 5 years too late.” What do I mean by 5 years too late? We can address the escalating costs of long-term care in numerous ways. One way is to purchase long-term care insurance. The other is to remove assets from your name. This can be done through gifting or simply transferring assets out of your name. For instance, you can transfer ownership of your home from your name to a child’s name. You can transfer an investment account from your name to a child’s name. Essentially, you are giving up ownership and giving up control. You probably don’t have to be an estate planning attorney to see many potential problems. What if you transfer away your home and life savings to your son or daughter who then divorce two years later? Oops. Additionally, if you liquidate a 401k or IRA to get assets out of your name you will likely be greeted the following April with a giant tax bill. Last, but certainly not least you have the specter of the 5-year lookback. When you file for Medicaid, the government will look back 5 years. Any assets that were transferred out of your name within the past 5 years do not comply with Medicaid laws, thus are counted as assets, which means you must spend them before Medicaid kicks in. That’s right, spend all assets down to either $2,000 or until the transfer is 5 years old. Yikes.
A potentially safer way to get assets out of your name is an irrevocable trust. It is important to pay attention to the name. While an irrevocable trust will legally remove assets from your estate, and will shield them from Medicaid spending requirements (assuming the trust was established 5 years before applying for Medicaid), irrevocable means once it is established, those are no longer your assets. There is a type of trust known as a revocable trust, which can be dissolved and have assets returned to you, however, a revocable trust does not shield assets from Medicaid spending laws.
The decision to remove large assets from your name and ownership is a decision that many do not want to make. Your assets are a culmination of a lifetime of work. Wanting to retain ownership of these assets while you are healthy is a normal desire. If that is the case for you then insuring against long-term care costs can enhance your ability to weather long-term care costs, if they become a reality, and allow you to pass most of your assets onto the next generation without being drastically depleted.
Types of Long-Term Care Insurance
The first type of long-term care insurance is what is known as traditional long-term care insurance. In many ways this type of policy is structured like a disability income insurance policy. First, you select an elimination period or self-insurance period. Common elimination periods are 30, 60, 90 and 180 days. For instance, if you selected a 90-day elimination period and had to enter a nursing home, you would pay for the care out of pocket until the elimination period was up (in this example, 90 days). After the elimination period coverage is typically triggered when you cannot perform 2 of the six daily activities of living. While this is common it is important to understand your specific policy as companies can differ as to what triggers coverage. Six activities of daily living include: getting dressed, toileting, transferring, grooming, showering and eating. Most of us would agree those are pretty important.
After the elimination period you must select the amount of coverage you want or believe you will need. The policy will specify how much coverage you get per day or month and how many years it will pay. For example, a policy may provide $6,000 in coverage per month for a 2, 3 or 5 year period. Any charge above the $6,000 would have to be paid out of pocket. The better policies will come with an inflation guard to help the benefit keep pace with actual costs over the years. While a policy with a $7500 benefit per month may cover most expenses today, it likely will not in 15 years. However, if the policy has a 3% compound interest inflation guard built into it, the $7,500 benefit will be approximately $11,600 in 15 years. I had mentioned that states now have approved policies. In Ohio these are called Partnership qualified policies . For instance, if your total benefit provided by the long-term care insurance is $300,000, you can apply for Medicaid when your total assets are $300,000. $300,000 of your assets are protected from the $2,000 spend down rule that applies to most people.
Cons to Traditional Long-Term Care Insurance
Traditional long-term care coverage is not without its drawbacks. The longer one waits to get coverage the most expensive it becomes. Second, the premiums are rarely guaranteed. If the issuing company is not good at underwriting, they may be forced to increase the policy costs, even with existing policy holders. Finally, there is a chance one pays for it and never needs to use it.
Alternatives to Traditional Long-Term Care.
The insurance industry has created several products to enhance the options for offsetting the costs of long-term care. For instance, our firm has appointed with life insurance companies that offer a long-term care benefit as part of their policies. Many of our clients like this option because the policy is guaranteed to be used for something: either a death benefit or to help pay for long-term care. These are often referred to as “Hybrid” policies. With these policies if you need long-term care, you can accelerate, or use a portion of the death benefit, while you are alive to pay for long-term care. We may use such policies as a stand-alone policy or couple them with a client that has a revocable trust that is less than 5 years old. The hybrid policy can help them bridge the gap between the 5-year look-back rule for trusts and preserve potentially hundreds of thousands of dollars.
There are also many annuity products issued today that will increase their payout (often double) in the event you need to enter a long-term care facility. This extra stream of income can help pay for the added costs. For instance, if I am receiving $2500 per month in income from an annuity that has a long-term care income enhancer built into it, my monthly stream may increase to $5,000 if I need long-term care.
Bottom line is there are numerous ways to address the need for long term care. Which one is best is a highly individualized solution. I recommend consulting with your advisor and reviewing all options. According to the Long-Term Care Partnership, 70% of people over the age of 65 will need some form of long-term care at some point in their lives. It’s a real problem but if you are willing to take the time, there are solutions.
Crosby Advisory Group, LLC is a Registered Investment advisor in the state of Ohio. At any time you may request a copy of our Form ADV 2A and Form ADV 2B, which provides information about the qualifications and business practices of Crosby Advisory Group, LLC. This article is for information purposes only and should not be taken as direct investment advice for you without a consultation. Investing involves risk and you should carefully consider all risks and expenses before making an investment. Crosby Advisory Group, LLC is also a licenses insurance advisor. Insurance products are serviced through Crosby Advisory Group, LLC. If you have any questions you can send us a comment by visiting our website at crosbyadvisory.com Our office number is 419.496.0770