In-home and residential long-term care is expensive and not covered by Medicaid. What are the options?
No one likes to think about needing long-term care and the loss of independence it implies. But the reality is that most of us will, at some point, need assistance with daily activities - whether it's help with bathing, dressing, or more intensive care due to an extended illness.
There's no other way to say it: long-term care costs can be staggering - high enough to wipe out even a well-funded retirement account. And the vast majority of these expenses are not covered by Medicare or private health insurance plans. So how do you prepare for this often overlooked aspect of retirement planning?
Let's break down the key strategies for paying for long-term care so you can be ready if the time comes.
The Cost of Long-Term Care
First, let's talk numbers. Long-term care is costly and is one of the most significant expenses retirees may face. According to Genworth Financial's most recent survey, the median cost of a private room in a nursing home approaches $120,000 a year. While less expensive, assisted living facilities still cost over $60,000 a year - and more if you need help with tasks like dressing or bathing.
Even if you plan to stay in your home, hiring a home health aide costs around $30 per hour - or approximately $70,000 per year for three hours of help in the morning and the evening each day (six hours total). And remember, these are median costs, not what the costs may be in your area - which could be somewhat lower but are even higher on average.
These figures can be intimidating, but understanding the costs well in advance can help you better plan for them.
Medicare vs. Medicaid: What's Covered?
Before discussing the different ways to pay for long-term care, it's important to clarify what Medicare covers - and, more importantly, what it doesn't. Some people assume that Medicare will cover all of their healthcare needs in retirement, but that's not the case for long-term care.
Medicare will pay for a short stay in a skilled nursing facility, typically after a hospital stay, but only for a limited time. After that, you're on your own. Medicare also won't pay for help with daily activities, which comprise most long-term care needs.
On the other hand, Medicaid does cover long-term care, but it's a needs-based program, meaning you must have a low income and limited assets to qualify. Medicaid is often considered the safety net for those who have exhausted their savings. However, the rules vary by state, and the application process can be complicated.
To qualify for Medicaid, you may need to "spend down" your assets to $2,000 or so in total cash and savings. This rule can mean using your savings to pay for care until you reach the financial eligibility limits. It's not the most appealing option, but it's a reality for many retirees.
Further, qualification for Medicaid is also subject to income limits. So, for example, if you worked as a teacher and have a pension, chances are good that your pension income could disqualify you from benefits - no matter your healthcare needs.
Long-Term Care Insurance
One way to prepare for long-term care expenses is by purchasing insurance. These policies are designed to cover the costs of services like nursing homes, assisted living, and in-home care. If you buy the policy early enough - usually in your 50s or early 60s - you'll pay lower premiums, making it a more affordable option. Unlike health insurance coverage, you can be denied long-term care insurance if you have some pre-existing conditions.
However, long-term care insurance comes with its own set of challenges. Premiums can rise over time, policies often come with a long list of conditions, and they don't always account for the ever-increasing cost of care. In addition, policies usually cap the amount they'll pay out over a lifetime, so if you need long-term care for several years, the insurance might not cover all your expenses.
If you do choose to purchase long-term care insurance, a critical aspect to consider is how inflation is calculated. Some policies have no provision for inflation or calculate inflation at a percentage of the original benefit amount (which doesn't change). Other policies offer "compound inflation protection," in which the annual increase includes the previous year's inflation allowance in the calculation - much like compound interest increases the value of your investments. Given that medical care costs can rise faster than general inflation, a policy offering compound inflation protection is worth considering.
Hybrid Policies
For those looking for a more flexible option, hybrid long-term care insurance policies may be worth considering. These policies combine life insurance or an annuity with long-term care coverage. For example, if you purchased a hybrid life insurance policy and don't ultimately need long-term care, the policy pays out a death benefit to your beneficiaries, much like a traditional life insurance policy.
The upside of hybrid policies is that you're not paying premiums for a service you may never use. The downside is that these policies can be more expensive than traditional long-term care insurance. However, many people find comfort in the fact that their money isn't "wasted" if they don't require long-term care.
Self-Funding: The DIY Approach
If you're not keen on paying long-term care insurance premiums, self-funding your long-term care might be an option. This strategy involves setting aside a portion of your savings or investments specifically for long-term care expenses.
The amount you'll need to set aside depends on several factors: your health, your family's longevity, costs in your area, and the type of care you expect to need. For example, if you have a family history of Alzheimer's or other chronic conditions, you might want to save more aggressively.
Self-funding allows you to maintain control over your money, but it comes with risks. Long-term care costs are unpredictable, and there's always the possibility that you could outlive your savings. On the flip side, if you don't need long-term care, those savings are still available for other uses or can be passed on to your heirs.
Home Equity: Tapping Into Your Biggest Asset
For many retirees, their home is their largest asset. If you're faced with high long-term care costs and don't have insurance, tapping into your home equity might be an option. There are a few ways to do this:
Using home equity can be a practical solution for some, but it's essential to weigh the pros and cons carefully, especially if you want to leave your home to your family.
Veterans Benefits
If you're a veteran, you may qualify for VA benefits that can help cover the cost of long-term care. The VA offers a variety of programs, including nursing home care, in-home care, and assisted living services, depending on your level of need and service history.
In addition to standard VA healthcare, the Aid and Attendance benefit provides veterans and their spouses additional funds to help pay for long-term care. Eligibility for these benefits depends on your service record, income, and health status. Still, it's worth looking into if you served in the military.
The Takeaway
There's no one-size-fits-all solution when it comes to paying for long-term care. The best strategy depends on your financial situation, health, and care preferences. Whether you choose long-term care insurance, self-funding, or tapping into home equity, the key is to have a plan before you need it.
Waiting until you're faced with a medical crisis could limit your options and leave you scrambling to cover costs. By planning ahead, you'll do everything possible to protect your savings and ensure you have the care you may need.
If you need help creating a long-term care plan, please contact a qualified professional.
Flagler is a not-for-profit financial cooperative whose mission is enriching people’s lives… members, employees, community. Unlike other financial institutions, credit union ‘profits’ are returned to the membership in the form of lower loan rates, higher dividend rates, and affordable services.
