Authors: John M. Bartlett and Jerome C. Wegley
Originally published in October 2020
Copyright © 2020 Knox McLaughlin Gornall & Sennett, P.C.
Although many people fear that long-term care costs will impoverish them or their spouse, or will eliminate any inheritance for their family, only a small percentage of people use insurance to guard against this risk. This is for a variety of reasons, one of which is the concern that they will not need the insurance and will spend significant amounts on premiums.
Insurance policies that offer benefits of long-term care coverage and life insurance may help alleviate some concerns about non-usage, but are still expensive.
When used as part of a financial plan to hedge against losses due to disability or death, a combination policy mitigates some of the concerns regarding wasted premiums.
In all cases, LTC insurance can reduce the maximum amount of LTC costs an individual pays and increase the amount they can protect for their family.
However, the most compelling reason for long-term care insurance is quality of life. Although not discussed at length in this presentation, long-term care insurance allows you to stay in your home longer. When disabled, the cost of in-home care greatly exceeds nursing home costs and little, if any, in-home care is covered by Medicaid. Therefore, the real loss to against which to insure is the loss of living in your home. Long-term care insurance becomes more attractive if the probability and value of this loss could be calculated.
Long-term care is the care required by people for an extended period due to a medical condition or disability. The care receiver needs assistance in performing activities of daily living when she can no long complete these activities independently.
The six Activities of Daily Living (“ADLs”) include:
Recently, many nursing home facilities have offered Memory Care Units for people suffering from dementia and Alzheimer’s disease. These units provide skilled care but allow the resident more freedom in their movements. These units often have limited space so being able to get a bed here may take time or be unavailable.
For many seniors, being “put in a home” is one of biggest concerns as they age and become less independent. The senior cannot believe that after a lifetime of hard work, raising children and grandchildren and doing things “right” has her children thinking that she needs to be at an assisted living facility.
The caring for a parent, grandparent or other loved one as she gets older is a task contemplated by many people. Thinking about putting Mom or Dad in a nursing home is a big decision to make and will not come without some guilty feelings. There are pros and cons to caring for senior in her home or your own home. Some reasons may be readily apparent, while others may not be.
According to a 2019 study done by Genworth, there are two kinds of services that constitute in-home care: Homemaker Services and Home Health Aides.
Homemaker Services include aides that will help seniors continue to live in the home or return to the home by performing numerous tasks that the senior cannot complete alone. These tasks can include cooking meals, cleaning the home and helping the senior with other tasks or errands. In 2019, the daily cost of these services was $23.75 per hour, which equates to $149 per day, $4,528 per month and $54,340 yearly.
Between 2018 and 2019, the cost of these Homemaker Services has increased by 9.20%. As the number of seniors increases due to the Baby Boomers turning 65, the need for these services likely will increase and the availability of aides may decrease.
Home Health Aides provide more extensive services for seniors than the caregiver is typically able to provide (due to employment or lack of medical expertise). In 2019, the average cost of Home Health Aides was identical to the Homemaker Services. For full time help, defined as 44 hours per week, the annual cost will be $54,340.
Between 2018 and 2019, the cost of these Home Health Aides compensation have increased by 5.56%. Much like the Homemaker Services, the Home Health Aides’ availability may decline with the increase of people hitting retirement age.
The cost of these services is substantial but can allow a senior to stay in their own home or a family member’s home longer. As health conditions occur or increase, the senior might need an increased amount of hours for their care.
There is a break-even point between care at home and care at an assisted living facility or nursing home. Seniors want to consider if they are paying too much for their care at home.
Long-term care insurance policies cover certain costs that arise because of a disability or chronic medical condition. Long-term care insurance policies specifically help with services that are not covered by traditional health insurance.
A long-term care insurance policy pays for, or reimburses the insured, for multiple levels of services at home or an assisted living or skilled nursing care facility. Many of the long-term care policies than are sold today are comprehensive, allowing for care in homes, assisted living facilities, nursing homes, hospice and adult day service centers. Home care can include skilled nursing care, multiple types of therapy and help with activities of daily living (ADLs).
Under most policies, a person is eligible for benefits when she cannot perform two of six ADLs, or she is suffering some cognitive impairment such as dementia or Alzheimer’s disease.
Not everyone will require long-term care; and for those that do, the length and level of long-term care will be different for each person.
Consider the following:
Many factors affect the cost of long-term care insurance for an individual including:
Also:
Many people are concerned about paying expensive premiums for years and not utilizing them before their death. The general thought is that they do not want to pay for something that they may not use. For some people, a combination or hybrid policy may be more appealing.
A “combination” or “hybrid” life insurance policy incorporates a long-term care rider into a permanent life insurance policy. Hybrid policies can be an attractive alternative to traditional long-term care insurance policies. A combination policy often appeals to many middle-aged people who want to insure against both long-term care costs and dying.
A combination policy works in the following manner: The insured pays a premium in one or fewer installments, in exchange for less than 10 years of long-term care insurance coverage. The insurance policy provides a “pot” of money for long-term care. Usually, the pot of available money is first valued at face value or slight more for the death benefit and 2 to 3 times the premium value for long-term care benefits.
To the extent that the money is used to pay for the insured’s long-term care needs during lifetime, the money in the pot is reduced in relation to the amount paid for long-term benefits. Some policies guarantee a certain amount of death benefit while other policy’s death benefit will reduce significantly based on the payments during an insured’s lifetime.
When the insured dies, the policy pays a death benefit to persons whom the insured designates as beneficiaries equal to the money left in the pot at the time of the insured’s death.
See also: Hybrid Life Insurance: Combination of Long-Term Care and Life Insurance
Yes. Purchasing an annuity owned within the retirement account can be an effective way to provide long-term care insurance.
An annuity is a contract issued by an insurance company that converts money, the policy’s premiums, into a guaranteed fixed income stream. A deferred annuity can be purchased to schedule payouts to begin later and be specifically for long-term care.
One benefit of deferring these payouts is larger payments for your long-term care needs.
A deferred fixed annuity is purchased to offer enhanced care coverage. The annuity will often guarantee 2 to 3 times your initial single premium payment to generate long-term care insurance benefits that are tax-free.
The insured will be responsible for finding a qualified service provider and paying the costs out of pocket. The insurance company then will reimbursed the insured up to the monthly allowance. If there is any money left over in the annuity at the insured’s death, the beneficiary named by the insured during life will inherit it.
This is a deferred annuity with a long-term care rider. Like a traditional deferred annuity, this will provide future payments based on the initial lump-sum investment. A deferred annuity have an accumulation phase which is the time before you begin to receive payments. With a long-term care focus, this annuity will increase in value before the person accrues long-term care costs.
If a person were to invest $200,000, this amount would translate to $400,000 to $600,000 worth of long-term care benefits.
This type of annuity may be more attractive for persons who have certain pre-existing medical conditions. The underwriting for this annuity is less restrictive than for a traditional long-term care insurance policy but there is still some qualification performed. However, conditions denied long-term care insurance may qualify for the annuity approach.
The annuity can purchased with both qualified and non-qualified money:
You want to make sure to consult with a professional that has experience with these type of annuities. You need to understand your options and responsibilities before handcuffing a large amount of your money.
There are two options when it comes to paying for long-term care costs: private paying and Medical Assistance (Medicaid).
The recipient of the long-term care pays out of her own pocket on a monthly basis for the services she receives. This can be prohibitively expensive as the Pennsylvania average cost for services in 2019 were as follows:
The cost of yearly care can be anywhere from $47,000 to $125,000 based on the type of care being received. If a person needs 24 hours a day care, the monthly cost of home health aides jumps to $17,109 per month or just over $200,000 annually.
Medicaid is a joint federal and state public assistance program for financing health care for persons of limited income. It pays for certain health services and nursing home care for people with low income and limited assets.
Medicare, the federal health insurance program for people aged 65 or old, will only completely pay for the first twenty (20) days at a skilled nursing facility. If the stay is longer than 20 days, the insured is responsible for a coinsurance payment of $176 per day for up to additional 80 days. If the insured receiving skilled care exceeds the 100 day limit, he/she will have paid $14,080 for days 21 through day 100. If the Medicare recipient remains in the skilled nursing facility past day 100, she will be responsible to pay 100% of the cost and Medicare stop paying.
Medicaid Eligibility is based on being medically and financially needy.
When approved, the applicant’s income will be payed to the skilled nursing facility and Medicaid will be responsible for the remaining amount owed. If a Medicaid recipient’s income is $2,000 per month and she is in a skilled nursing facility that costs $10,000 per month, the recipient will pay that $2,000 to the nursing home and Medicaid will pay for the remaining costs.
Any amount that Medicaid pays for the recipient may be recovered by the state under the Estate Recovery Act. This is what people are referring to when they say, “I don’t want the government taking my house.”
Estate Recovery is run by the Department of Human Services (“DHS”). The DHS reviews the file of every Medicaid recipient that dies to see if the state can recover any money it spent on the Medicaid recipient.
If the recipient owned a residence that is included in her probate estate, DHS provides a Statement of Claim against probate estate that needs to be paid before the sale of the residence or deducted from sale proceeds.
See also: Is Medicaid Going to Take My Home?
Insurance should not be thought of as an investment, but rather a hedge against losses to your investments/assets. Many financial plans structure portfolios of investments for the highest probability of achieving the greatest returns. Thought should be given to the probability of losses to your net worth due to fire (homeowners insurance), accidents (car insurance), disability (disability and long-term care insurance), etc.
Like most insurance policies, long-term care insurance policies pay set amounts and do not fully cover the actual costs. While disabled, the individual is paying the excess long-term care costs, and the full amount of long-term costs when the policy terminates.
Medicaid is an important component of protecting assets; however, it only pays for skilled nursing costs (i.e. not assisted living or other levels of care). Medicaid pays for limited in-home skilled nursing services and is difficult to qualify.
In prior presentations and in other sections of our website, we have explained ways to become eligible for Medicaid without spending all excess resources on skilled nursing care. Depending on the facts (usually for non-married individuals), some amount of private payment must occur because the individual is ineligible for Medicaid because of giving assets away or being over resourced.
In almost every case, the maximum an individual would have to privately pay for skilled nursing costs is five years. This is because the DHS looks back only five years to determine whether the individual (or their spouse) gave assets away. Thus, an individual can give all of their assets away (or all but enough to pay for five years of costs), then apply for MA five years later. This strategy “capped” their LTC cost at five years.
Depending on the amount of assets, an individual could cap the LTC costs over a shorter period of time. This requires making a gift and purchasing a Medicaid Compliant Annuity. As explained in previous presentations, a gift creates a period of time the individual is ineligible for MA (an “Ineligibility Period”) based on the amount given away. One month of ineligibility for every $10,000 given away (The actual penalty devisor is $10,732.82, but $10,000 is used for simplicity of this presentation). The amount not given away is used to purchase a Medicaid Compliant Annuity that would pay to the individual sufficient amounts each month to cover the LTC costs through the Ineligibility Period. After the Ineligibility Period terminates, the individual applies for MA.
For a married couple, the Medicaid Compliant Annuity can save almost all assets and get an individual qualified for Medicaid immediately.
Although many people fear that long-term care costs will impoverish them or their spouse, or will eliminate any inheritance for their family, only a small percentage of people use insurance to guard against this risk. This is for a variety of reasons, one of which is the concern that they will not need the insurance and will spend significant amounts on premiums.
Insurance policies that offer benefits of long-term care coverage and life insurance may help alleviate some concerns about non-usage, but are still expensive.
When used as part of a financial plan to hedge against losses due to disability or death, a combination policy mitigates some of the concerns regarding wasted premiums.
In all cases, LTC insurance can reduce the maximum amount of LTC costs an individual pays and increase the amount they can protect for their family.
However, the most compelling reason for long-term care insurance is quality of life. Although not discussed at length in this presentation, long-term care insurance allows you to stay in your home longer. When disabled, the cost of in-home care greatly exceeds nursing home costs and little, if any, in-home care is covered by Medicaid. Therefore, the real loss to against which to insure is the loss of living in your home. Long-term care insurance becomes more attractive if the probability and value of this loss could be calculated.
Authors: John M. Bartlett and Jerome C. Wegley
Originally published in October 2020
Copyright © 2020 Knox McLaughlin Gornall & Sennett, P.C.