I started volunteering at assisted living and memory care retirement homes when I was about ten years old. I got involved because I lived in a small town and my mother was part of the care staff, but I always enjoyed listening to the stories and wisdom that the residents had to share. It wasn’t until many years later, when I became a financial advisor, that I became aware of the financial burden the residents and their families were carrying.
According to a 2017 Genworth survey, the national average cost for a private room in a nursing home is $8,121/month, or $97,452/year. That’s a lot of money, so when we construct financial plans for clients, we have to decide which of the following sources of funds they will use to pay for long-term care (LTC) if/when they need it:
Self-funding (using up part of their own investments and income)
Long-term care insurance (paying premiums long before they need long-term care)
Should You Rely on Medicaid?
Medicaid is a state-run program (unlike Medicare, which is federal), so its rules and provisions vary from state to state, but in a nutshell it pays for basic care when the recipient doesn’t have assets of their own. In an ideal world nobody would ever need to use Medicaid, but unfortunately, many people simply cannot afford either of the other two options above.
The good news is that, thanks to Medicaid, everyone will at least be able to receive essential long-term care services, regardless of how little money and income they have. But don’t make the mistake of thinking Medicaid is free. The deductible on Medicaid is essentially everything you own. That’s because, to qualify for Medicaid, a couple must spend down assets until they reach certain state-specified asset limits. In Washington state, for instance, the non-Medicaid spouse can only keep 50 percent of their shared assets, up to a maximum of $123,600, plus a home valued at $572,000 or less. However, when the house is sold after that spouse’s death, Medicaid can appropriate the proceeds of the house to recoup Medicaid expenditures.
As a financial advisor, I do not recommend that most people plan to count on Medicaid. The other two above options are far better if you can afford them. Unfortunately, not everyone has enough assets or is able to work long enough to afford LTC insurance premiums. According to the Center for Retirement Research at Boston College, people are forced into retirement early for three primary reasons:
Involuntary job loss
Family changes (you can’t always predict when your parents are going to need your help, or when you or your spouse will get sick)
For those with limited assets who are forced into retirement early, Medicaid may be their only feasible option and it is important to plan ahead if that is the case. Indeed, there are many strategies that financial planners and elder law attorneys utilize in Medicaid planning. These usually center around dealing with Medicaid’s look-back rules. The look-back rule means that any gifting you did to dispose of assets (in order to qualify for Medicaid benefits) within a certain period — commonly five years — prior to filing for Medicaid benefits must be reversed and that money spent down to pay for care before Medicaid benefits begin. Proper planning, therefore, is important in order to ensure that if one spouse goes into a nursing home, the other spouse can still live comfortably for the rest of their life, too.
How Likely are You to Need LTC and For How Long?
According to LongTermCare.gov, someone aged 65 today has an almost 70 percent chance of needing long-term care services. This means that it is extremely likely that, for a married couple, at least one or the other will need LTC. On the positive side, there is slightly less than a 50 percent chance that both will need LTC.
For those that do need care, the average length of that care is three years. That doesn’t necessarily mean three years of skilled nursing care in a facility, however. It is more common for someone to need two years of in-home care, and only one year of nursing care. This distinction is important because in-home care, as long as it’s only part-time, can save a lot of money! In a 2011 MetLife survey, the average cost of part-time in-home care was $21 per hour, or $21,840 per year. Three years of care, therefore, assuming two years at home and one year in a nursing facility, adds up to $141,132. While that’s still a considerable amount of money, it is less than half the cost of three years of nursing home care at $97,452 per year. Bear in mind that these costs are in today’s dollars. As demand for long-term care increases, it is reasonable to expect costs to increase as well.
LTC Insurance: Full or Partial Coverage?
Assuming that you and your spouse don’t want to count entirely on Medicaid (because that runs the risk that the spouse who isn’t using long-term care will be left with few assets), LTC insurance may be the solution. But the question is: how much? There is no right or wrong answer, so long as you and your spouse decide together on the balance between how much coverage you can afford and how much risk you are comfortable bearing yourselves. Consider these coverage alternatives:
Just one. Buy just enough LTC insurance to cover the cost for one of you, in order to protect the assets and lifestyle of the other. In this case, the other spouse would, therefore, plan on using up any assets and potentially Medicaid if the assets run out before the second spouse passes away.
Fully insure both you and your spouse, thus allowing the first surviving spouse to maintain his/her lifestyle. By having the second spouse also covered, this option also preserves your assets, either for your heirs when you are both gone or to provide for extra LTC costs if either of you remains in LTC long after the insurance benefit period.
Remember, people who need LTC need it for an average of three years, but we all know of someone who was in a nursing home far longer than that. By insuring both spouses you don’t just protect your assets for the surviving spouse’s lifestyle, you also protect the assets from the second spouse’s care expenses and make it far more likely that you will leave an estate to your children or other heirs. Of course, insuring both of you is much more expensive.
Shared Care. The most popular option is somewhere in between the first two. Remember, the chance of both of you needing long-term care is a little less than 50 percent. The most practical way may be to choose a policy that will cover 4-5 years of care for whichever of you needs it. For example, one spouse might need three years of LTC and the other just one year, or one spouse might need no LTC, so the entire 4-5 years of coverage could be used by the other.
If, between you, more than 4-5 years of LTC is needed, you would need to use your own assets and income to pay for the time beyond that.
Partial coverage. LTC insurance agents generally want to sell you a policy that completely covers the cost of LTC in your area. But, unlike most types of insurance, you don’t get a better deal for buying more LTC coverage. Whatever the premium is for a $250/day benefit ($7,500/month), half that much coverage ($125/day or $3,750/month) will likely cost exactly half as much. In other words, it’s not an all-or-nothing question; if you don’t want to spend the amount necessary for full coverage, and you can afford to self-insure (use up some of your assets and income) for part of your potential LTC costs, just buy LTC coverage for the other part.
LTC Insurance, Self-Insuring or Door #3?
Aside from Medicaid (which we assume you’re trying to avoid), there are three popular options for funding LTC needs. I mentioned the first two at the beginning of this article, but the third is one you might not have heard of.
Self-insuring, aka self-funding, which means you have sufficient investment assets and income to cover all LTC costs that may arise. This is a reasonable alternative, especially if your net worth exceeds $2 million and/or you aren’t concerned about leaving most of it to heirs after you are gone.
Interestingly, even some of our clients worth many millions of dollars who can easily afford to self-insure choose to buy LTC insurance — at least for partial coverage — as a peace-of-mind expense. The cost of the insurance premiums is well within their means, and they prefer sharing some of the risk/cost of long-term care so that their estates don’t have to bear the total cost if they do end up needing LTC services.
LTC insurance is a good way to shift the bulk of the likely costs of LTC to an insurance company in exchange for annual premiums. For some people, LTC insurance may not be an option, due to poor health or limited means (i.e., they can’t afford the insurance premiums). For others, LTC insurance may be a near-necessity in order to protect a spouse from being financially devastated if either of them ever needs long-term care. And for others, it may be a choice of whether — and to what extent — they prefer to self-insure, buy LTC insurance or some combination of the two.
Other considerations include:
Couples should consider getting a “shared care” policy, like the 4-5 year example I used above. With a shared care policy, one spouse can use up some (or all) of the total benefit, thus providing more years of coverage at a lower cost.
The younger you are when you buy LTC insurance, the lower your premiums will be, initially and later. Your premiums will always be based on your age when you first bought the policy. Opinions vary as to the best age to get coverage, but I don’t suggest waiting beyond your fifties. Besides lower premiums, health is a consideration. A friend of mine discovered — in his early forties — that he had kidney disease, and instantly became unable to get LTC, as well as life, insurance.
Although LTC insurance premiums normally don’t increase as often or as much as health insurance premiums, you should still anticipate that premiums will increase over time.
I have also found that it is often cheaper to get a larger policy with no annual inflation adjustment than it is to get a smaller one with it.
For example, I recently got a quote for a woman in her early 60s. I had them quote one policy with a monthly benefit limit of $5,000 with a 3 percent annual inflation adjustment, and another policy with an $8,000 monthly benefit with no inflation adjustment (but roughly 16 years of 3 percent inflation already built in). The cost of the $8,000/month policy was less.
Important note: LTC insurance is one type of insurance that you want to buy only once. That’s because your age is “set” at the time of purchase so that, even though your premiums will increase over time (because the cost of insuring someone that age goes up), they will be far lower than buying a new policy when you are older. One implication of this is that you want to buy LTC insurance from a very strong, highly-rated insurance company, because if that company ever goes under, you will have paid years of premiums for nothing and will have to buy a new policy (based on your current age at that time) at a much higher cost.
Door #3: Fixed Annuity with LTC Rider. This is really a hybrid of the first two. It involves investing a substantial amount of money in an annuity policy, and the insurance company immediately covers you for LTC expenses of 2-4 times the amount you invested. The company will only cover LTC expenses with its own money once your deposit is exhausted. If you never need long-term care, the money you originally invested goes back into your estate (for your heirs).
One reason this option is attractive is that, because the insurer’s risk is cushioned by the money you deposit, it is typically easier to get than a straight LTC policy, with less rigorous medical exams.
The cost of such policies is essentially the loss of any return on the money you deposit; it will likely see little or no growth, even if it is in place for many years — even decades. In essence, the company is providing LTC coverage (over and above your deposit) in exchange for getting to use your money. Another way to think of it is that the LTC insurance policy has a deductible the size of your original deposit.
For example, let’s say you deposit $100,000 in an annuity with a LTC rider that immediately gives you $300,000 in long-term care insurance. If you end up needing $120,000 worth of long-term care and then pass away, the first $100,000 spent was your own money and the last $20,000 was the insurance company’s money. Your beneficiaries would get nothing. If, on the other hand, you never needed any long-term care, your family would get back the original $100,000, even if your money was there for 20 years before you died.
For perspective, if that same $100,000 in the example was invested in a regular fixed annuity yielding 3 percent, it would grow to $180,000 over that 20-year period. If you never need long-term care, that entire $180,000 would go to your heirs. But, for an apples-to-apples comparison, you would need to also purchase (and maintain until you die) a regular LTC insurance policy with a maximum total benefit of $300,000. Whether the premiums for that policy would end up being greater than the return you’d achieve by investing $100,000 in something else depends on a lot of variables that are impossible to predict, including the length of time before you need LTC services, how long you need those services, when you will die, how rapidly the premiums on the regular LTC insurance rise and so on.
Part of the appeal of the hybrid annuity is that it nails down the LTC coverage cost (i.e., your loss of the use of the amount you deposit). Its lack of a normal investment return doesn’t make it a bad option, it just reflects the fact that no insurance is free.
Hopefully, now that you have an idea how much long-term care costs, how likely you are to need it and some basic information about the types of LTC insurance that are available, you can start to consider your options and what might make sense for you. The best advice I can give you is to work with a financial planner, preferably one who isn’t going to try to sell you something to make a commission, but rather will just help you quantify your need for LTC insurance and other LTC funding options.
The key is that you don’t want your only advice to come from someone trying to earn a big commission by selling you an overly expensive insurance product that isn’t going to fit your needs. A good fee-only financial planner, in contrast, who is in a fiduciary role (meaning they must recommend what’s best for you) will instead charge you for their time and advice and will give you objective advice on long-term care solutions, help you accomplish your long-term goals and can also help you find the most affordable sources to implement that advice.
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Published in partnership with Viridian Advisors. Viridian is an SEC registered investment advisor (RIA) with clients across the United States. Viridian offers financial planning, asset management and employee benefits advice as well as tax services through its sister company, Viridian Tax and Accounting. Matt Boelter is a fiduciary financial advisor who is licensed to sell long-term care insurance. He does not receive a commission from the sale of the insurance.
About the Author
Matt Boelter is a financial planner who focuses on helping people transition into retirement, manage retirement income and ensure their legacy transitions smoothly. Most of his clients have worked for Boeing, Microsoft or Amazon, enabling him to bring a uniquely detailed understanding of their retirement benefits to our firm.
At a pivotal time in his life as a child, Matt witnessed firsthand the stress that money matters can place on a family. He immediately took a strong personal interest in finance. By the 10th grade, he was trading stocks. After college, when he first met a financial planner, he realized he could combine his love of investing with his desire to help others plan the secure future he never had. He now gets regular invites to speak to retirement groups and has been published in MarketWatch.
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