As people live longer and longer, it becomes increasingly important to plan thoroughly for “life after work.” Most people know they’ll need to prepare financially for retirement, but they often overlook the possibility of paying for a long-term care event or misunderstand how this kind of care is funded.
At Strata, we look at our clients’ financial worlds through a holistic lens, meaning we consider an individual’s entire situation before we make recommendations. And in the many cases we’ve managed, we’ve learned one thing—there simply isn’t enough education or awareness about long-term care planning. So, in our next couple of blogs, we’re sharing some information about long-term care and how to best prepare for it.
What qualifies as Long-Term Care?
Long-term care, or LTC, is (as the name implies) a form of medical or assisted-living care administered over an extended period, generally referring to care of the elderly. And while it’s not top-of-mind for most people in their earning years, it’s an important scenario for everyone to consider and plan for, as more than two-thirds of individuals over the age of 65 will require long-term care at some point in their lives.
Many people associate the term “long-term care” with living in a nursing home or assisted-living facility, but long-term care can also mean having a professional care for you in your own home. Unfortunately, due to lack of planning or resources, not everyone has a choice in the kind of long-term care they receive. Home health care can cost anywhere from $56,000 to more than $200,000 annually if around-the-clock skilled nursing care is required, and the cost of assisted-living facilities in the New York City metro can range from $79,000 to $102,000 annually—which is why it’s important to prepare for these costs.
The Government & Long-Term Care Coverage
One common misconception about long-term care is that the government will pay for it, particularly if an individual is on Medicare—but that’s not exactly the case. Medicare will cover skilled care at a nursing facility after a three-day hospital stay. And even then, it only covers the full cost for the first 20 days; after that, it will cover a portion of the cost for up to 100 days—from there, it’s the individual’s responsibility to cover the cost.
Medicaid, on the other hand, is a program designed for low-income households, so there are specific income and asset requirements* an individual must meet to qualify for Medicaid. If an individual qualifies, Medicaid will cover the cost of long-term care only at approved facilities.
Another common misconception is that the government (or even LTC facilities themselves) will seize your assets to pay for your long-term care—but again, that’s not the case. Medicaid will only take responsibility for the cost of your care once you’ve spent your assets and your net worth has fallen below the threshold, making you eligible for benefits.
*Something to understand about Medicaid eligibility is the “Five-Year Look Back” policy. When determining an individual’s eligibility, Medicaid reviews their records from the previous five years. The purpose is to discover if a person might have gifted or transferred assets out of their name in order to purposefully impoverish themselves and therefore qualify for benefits.
Will My Health Insurance Cover Long-Term Care?
The short answer is no—typically, health insurance doesn’t cover this type of care. Fortunately, there are other ways you can prepare for these costs.
How Can I Prepare for LTC Costs?
There are two primary ways you can plan for long-term care costs: purchase a LTC insurance policy or self-insure. There are advantages and disadvantages to each, so it’s important to discuss your situation with a financial professional to determine the best option for you.
Self-Insured Long-Term Care
In this case, self-insuring simply means setting aside funds you can use later for long-term care. That said, for this strategy to be effective, there are several factors to consider and address:
- The cost of long-term care is rising year over year, so you’ll need to ensure your savings keep pace—this usually means implementing some sort of investment strategy.
- There are multiple ways to save money for LTC costs—in a retirement fund, in cash, etc.—and you’ll want to determine what kind of vessel is most advantageous for your situation.
- If you’re married, there might be legal complications down the road unless you work with an attorney to ensure your assets end up in the right hands—for example, if the assets are in your name and you pass away before your spouse, you want to make sure your spouse has access to those funds you set aside for long-term care.
Self-insuring isn’t for everyone; for this strategy to be beneficial, you must have the means to set aside cash for long-term care, and even then, doing so could potentially diminish your retirement lifestyle. There’s also the possibility you could bankrupt your spouse if you end up needing more money than you planned for LTC, or if you need it sooner than anticipated.
Policies to Cover Long-Term Care
The primary reason most people purchase a LTC policy is so they can receive the kind of care they want, rather than be left with fewer or less attractive options. There are several types of LTC policies, so it’s important to understand the features and benefits when choosing one.
Traditional LTC is the type of policy most people are familiar with, and it allows for the most flexibility when designing your benefits.
Hybrid Life & LTC policies are designed for individuals who have a LTC and life insurance need. With this kind of policy, you can leverage your death benefit to pay for LTC costs, but if you pass away without needing long-term care, your death benefit is passed on to your beneficiaries.
If you decide to self-insure, you might consider Asset-Backed LTC coverage; this strategy allows you to leverage your current assets for LTC purposes. That means if you set aside $100,000 in a savings account, you could then reposition that cash into this type of insurance policy. It would then enhance your savings (so your $100,000 might be worth $400,000) for the purposes of long-term care. This kind of insurance policy also offers a death benefit, a return-of-premium feature, and can grow at a fixed rate to help your savings keep pace with inflation.
Legal Work, Gifting Strategies, and Asset Transfers
Some people opt to set up trusts or start a gifting strategy to transfer assets out of their name. Though this can be an effective strategy for some, it’s important to remember that you will lose control of and access to those funds. One of the most common strategies used by elder-care attorneys is to transfer the primary residence to an irrevocable trust; this can be an effective strategy if you plan to live the rest of your life in that home. Transferring liquid assets requires more planning, as you must make sure you won’t require those funds later to supplement your lifestyle or expenses. It’s also difficult to predict when you will need care, and you must consider the Five-Year Look Back for this strategy to work seamlessly. This strategy is typically used in conjunction with one of the others mentioned above.
When it comes to long-term care planning, there is no one-size-fits-all solution. Each person’s situation is different, so it’s best to have an open mind and consider all your options. One thing is true for everyone, though—the earlier you start planning, the better. That’s why we recommend meeting with a financial professional as soon as possible to discuss the best strategy for you. We’ll review your options with you, identify potential risks, and help you find the solution that best fits your needs and goals. If you’d like to talk with one of our planning professionals, we’d love to help—you can schedule a consultation with us here.