You’ll Never Need Long-Term Care, Right? Nope. How To Protect Yourself

If you ever require long-term health care, will you be ready? When a disastrous malady requires that you be bed-ridden and under medical care for a long time, not a lot of people are ready. It costs a boatload of money if you’re not insured. Bill Harris, co-founder at WH Cornerstone Investments in Duxbury, Mass., highlights the financial issues to consider.

Larry Light: Few people think they will ever need any form of long-term care, whether in assisted living or a nursing home, but the actual figure is closer to 70% of those now age 65 or older. When thinking about the costs, what qualifies as requiring care?

Bill Harris: While part of that figure will come from people in rehab for a brief period following the growing number of knee or hip replacements, the rest can be there because they cannot perform two of the six “activities of daily living” or ADLs used to measure personal independence: eating, bathing and hygiene, dressing, grooming, mobility, and toileting and continence. And if not in a nursing home, those lacking independence would need support from loved ones and aides at home, which also carries a high cost.

Light: Should long-term care be part of retirement planning?

Harris: As we calculate our financial needs in retirement, the cost of long-term care is often overlooked or underestimated. And that one failure can derail the best-laid plans. But ask someone about needing long-term care in the future, and the common refrain will be, “Don’t worry, it won’t happen to me.”

Remember, about 70% of those people will be wrong. So, to understand how to offset or mitigate that drain on retirement savings, it’s best to look at the available payment alternatives.

Light: What type of costs should retirees consider in their planning when people are living longer?

Harris: Let’s look at people aged 65 today: 52% of men will reach age 85, 31% will reach 90 and 13% will reach 95. For women, 62% will reach age 85, 41% will reach 90 and 20% will reach 95, according to the Social Security Administration. And they are living with chronic health issues. So even if they plan for long-term care costs, they often underestimate, which isn’t difficult to do.

Genworth Financial has tracked the cost of long-term care services for nearly 20 years. Their Cost of Care Survey reported these annual costs on average for the U.S. in 2020: In-home homemaker services: $53,768. In-home health aide: $54,912. Community adult day care: $19,240,.Community assisted living facility: $51,600. Nursing home semi-private room: $93,075. Nursing home private room: $105,850.

Note that this is the average across the United States. Cost of care in the Northeast is extremely high compared to other regions. And because demand will increase faster than supply as Baby Boomers continue to age, those costs are projected to nearly double in the next 20 years.

Light: So, if we – or our parents – were to need long-term care, how would we be able to pay for it?

Harris: In the past, long-term care insurance was a traditional way to cover such costs. Premiums were affordable to many, and coverage was generous. But over the past 20 years, a changing industry structure and rising health care costs have caused many insurers to abandon that business.

Those who continued have escalated premiums uncontrollably while slashing benefits. They put caps on daily payments, extended the elimination periods before policies kick in, and limited the term and the maximum amount the policy will pay. Premiums are lower for younger buyers, but you could be paying premiums for decades. And if you die before needing long-term care, all the paid-in premiums would be lost.

Light: Is there a solution to the use-it-or-lose-it problem?

Harris: The industry created hybrid long-term care insurance policies, which combine life insurance benefits with long-term care coverage. Policies can be purchased for a lump sum or paid over time. If you die before needing long-term care, your designated beneficiaries receive the death benefit. But if you need long-term care, the policy will pay out as a traditional one would, in keeping with what you selected as the daily benefit, elimination period, term and total cap. And, depending on use, the death benefit will be reduced or eliminated.

One detail though: remember the elimination period? Today’s policies typically have 90-day elimination periods, with some as long as 180 days. That means for example, you must pay for the first 90-180 days of care in a nursing home.

Light: What are the benefits for our veterans?

Harris: The Department of Veterans Affairs may not be the easiest bureaucracy to navigate, but it has some valuable programs for those who qualify. And once approved, benefits are paid retroactively to the date of application. If you need help, contact the VA directly or use a VA-recognized organization or individual known as a Veterans Service Organization, or VSO, to avoid the high number of aggressive scammers.

If you receive a VA pension and are mostly confined to home because of a permanent disability, you may be eligible for the VA’s Housebound program. The program can increase the veteran’s pension income and allow for credit for unreimbursed medical expenses. Alternatively, you may qualify for the VA Aid and Attendance, or A&A, benefit. But you can’t receive A&A and Homebound.

A&A requires that you meet four criteria that work in combination: military service within particular dates, an asset test that measures your financial need, medical need and an income test. The last two work as a ratio indicating how much of your medical need can be covered by your income. In 2021, A&A could raise a single veteran’s benefit to over $23,000 per year and to nearly $37,000 for two married veterans who both qualify for A&A. This benefit is in addition to the other services provided to veterans.

Light: Does Medicare help with long-term care costs?

Harris: Many are unaware that Medicare does not pick up long-term nursing costs. It does cover short-term care, say following a hospitalization, but it only pays fully for 20 days. It pays partially for days 21 to 100, and then you’re on your own. Medicare’s coverage is health-related, not care-related.

Light: Will Medicaid help?

Harris: The federal government will pick up the cost of skilled nursing care, but it will be through the Medicaid system and only if you have limited income and countable assets. And some people’s assets are too significant to qualify ever.

For those who might qualify, what few people understand is how those assets are calculated. The term used is “spend down,” which means how much of your existing assets you must spend to qualify for assistance. The person going into care undergoes one calculation, and the stay-behind spouse undergoes another. It is worth investing the time to understand the details.

One last factor is “Medicaid recovery.” In the spend-down process, you are allowed to retain a home, a car, and certain other assets. Once both you and your spouse die, Medicaid can present the accumulated bill it paid for your, and possibly your spouse’s, care as “first position” against your beneficiaries’ inherited assets, including the house. If there is nothing left to inherit, the invoice disappears.

In doing these calculations, your assets can be protected with mechanisms such as trusts, but Medicaid has a five-year “look-back” period, where it disallows the transfers of assets. In short, qualification for this benefit should be part of careful pre-planning, which is best done with the help of an advisor or estate planner.

Light: So, what are the best steps to take to plan how to pay for these costs?

Harris: Once long-term care is on the horizon for you or your spouse, the first thing you’ll likely do is make a list of all the financial resources you have to help pay for it. This might include your savings, investments, pensions, existing IRAs and 401(k)s, and equity in your home for an equity loan or reverse mortgage.

In addition, you might list marketable whole life insurance policies that can generate cash through a life settlement or surrender. More creative solutions could include insurance products with critical-care riders that allow for distribution of most of the death benefit during life to cover the costs of long-term care costs.

Light: Do you have any final insights?

Harris: In summary, the cost of long-term care is onerous enough to merit being part of any discussion of retirement plans. Yet so many believe it could never happen to them. If you prepare, the worst thing would be to have the resources when you need them. The best thing would be to have the peace of mind of knowing you are prepared, never need the care, and have a structure that leaves all the preparation resources available to heirs and beneficiaries.