It's not fun to think
about, but if you boil down your choices a bit, making a plan for what could
easily cost several thousand per month becomes less daunting.
by: Carlos Dias Jr., Wealth Adviser February 28,
2018
For
many retirees, the term "long-term care" is typically associated with
a nursing home. As we age, there is a greater chance we will need some sort of
long-term care in the future. According to the U.S. Department of Health and
Human Services, 70% of people over 65 will need long-term care
at some point in their lives.
The
worst part is that many will not (or do not want) to discuss the need to plan
until it is possibly too late. The good news is that you have many options, but
you might need to get a little creative. Take one of my clients, as an example.
Fifteen years ago, at age 60, she had purchased long-term care insurance
policy, and over the years had paid about $45,000 in premiums for a
$7,600-a-month long-term care benefit with a 90-day deductible (known as an
"elimination period"). The policy had a five-year limit, for a total
payout possibility of $456,000.
Now,
at age 75, she was worried about the rising cost of her insurance coverage as
well the possibility that she would never use the policy, getting nothing for
all the money she paid on premiums. She had $200,000 in a bank CD that she
didn't need for her living expenses, so we came up with an alternative plan.
She ditched her old long-term care plan and used the $200,000 to replace it
with an $8,800 monthly long-term care benefit with a 0-day elimination period
for four years (a $422,000 total payout). On top of that, if she never uses the
benefit, her kids would receive a $211,000 death benefit (a return of her
deposit and minimal interest).
So,
how can you prepare for long-term care costs? Here are six options:
1. Self-pay
The
most obvious choice, but it comes with a hefty price tag. A Genworth Cost of Care Survey conducted
in June 2017 revealed the national median for the following services:
·
Home health aide
services: up 6.17% to $21.50/hour
·
Homemaker services: up
4.75% to $21/hour
·
Adult day health care
services: up 2.94% to $70/day
·
Assisted living
facilities: up 3.36% to $123/day or $3,750/month
·
Semi-private room
nursing home care: up 4.44% to $235/day or $7,148/month
·
Private room nursing
home care: up 5.50% to $267/day or $8,121/month.
Due
to higher labor costs and stricter laws, expenses have and will continue to
increase. Even though care received at home is more affordable than in a
nursing home, you can never anticipate future needs.
2. Government benefits
Many
retirees think that Medicare will pay for their long-term care. Unfortunately,
this is not true and often one of the biggest misconceptions. Although Medicare
covers some home and nursing home care, it is only for rehabilitation purposes
and not categorized as long-term.
If you're a veteran, there is a pension with aid and attendance available. The amounts are contingent on if you're: single (up to $1,830 per month); married (up to $2,170 per month); or a surviving spouse of a veteran (up to $1,176 per month). There are certain conditions that need to be met, such as proof of service and a doctor's evaluation, in order to receive the benefit.
Retirees
can also pursue their state-run Medicaid program to cover long-term care
expenses. But qualifying for Medicaid is not easy since
it is based on federal poverty guidelines. If you're single, depending on the
state in which you live, the income limit is around $2,000 per month, and your
assets (excluding the value of your home and vehicle) can't exceed around
$2,000. Married couples can have assets as high as $120,900. Make sure to use
an elder law attorney with experience if you decide to pursue this route.
Planning
for long-term care through government benefits can be a challenging task,
especially for couples.
3. Traditional long-term care insurance
This
choice has been around for decades but is no longer as cost-effective as it
once was. For a retiree choosing to purchase traditional long-term care
insurance today, it may lead to regret in the future. Why? With rising policy
premiums and stricter state reserve requirements, there aren't a plethora of
insurance companies to choose from anymore.
In
addition, unless a return-of-premium rider was purchased in the past—a feature
not offered on newer policies—your traditional long-term care insurance policy
would have no value today if it lapses or you pass away.
4. Combined life insurance with long-term care
benefits
One
option retirees are using is a combined life insurance policy with long-term
care benefits (also known as a "rider"). Not only are there similar
features available (e.g., inflation protection and different elimination
periods to choose from), but if you pass away prematurely, your beneficiaries
receive a tax-free death benefit.
The
biggest difference you should be aware of is whether the policy has either a
chronic illness or long-term care rider. A competent financial adviser
well-versed in long-term care will know the difference between both.
5. Combined annuity with long-term care
benefits
Similar
to aforementioned, a combined annuity with long-term care benefits might offer
a higher dollar amount or more lenient underwriting in lieu of a tax-free death
benefit.
Currently
offered by a select few insurance companies, the key is to make sure it is
classified as long-term care. Some financial advisers are selling annuity
policies with a double benefit (also known as a "home health care
doubler") that pay at the most a maximum of five years and are not deemed
long-term care.
6. Life settlement
If
you have an existing life insurance policy—whether term or permanent—legally it
is an asset with ownership rights. Life insurance policies contain some sort of
value that often goes unrecognized. In fact, you might allow your life
insurance to lapse because it's no longer needed, but could've converted it
into a long-term care benefit. Many retirees, including one of my own clients,
are using their existing life insurance policies as collateral to fund their
future long-term care needs.
My
76-year-old client had a life insurance policy with a $1.2 million death
benefit on which he was paying $35,000 in annual premiums. The policy had very
minimal cash value, and he was contemplating letting it lapse. By using a
Medicaid life settlement, he was able to exchange his life insurance policy for
about $350,000 worth of long-term care to pay for home health, assisted living
or nursing home expenses in the future.
It's
never too early to plan for long-term care, so make sure to include it as part
of your financial plan in retirement.
This
article was written by and presents the views of our contributing adviser, not
the Kiplinger editorial staff. You can check adviser records with the SEC or
with FINRA.
Carlos Dias Jr., Wealth Adviser Founder and President, Dias Wealth LLC is a
financial adviser, public speaker and president of Dias
Wealth LLC, in the Orlando, Florida, area, offering strategic
financial planning services to business owners, executives, retirees and
professional athletes. Carlos is a nationally syndicated columnist for
Kiplinger and has contributed, been featured or quoted in over 100
publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street
Journal, U.S. News & World Report, USA Today and several others. He's also
been interviewed on various radio and television stations. Carlos is
trilingual, fluent in both Portuguese and Spanish.
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