How Long-Term Care Enhances Asset Protection


Authors: John M. Bartlett and Jerome C. Wegley

Originally published in October 2020

Copyright © 2020 Knox McLaughlin Gornall & Sennett, P.C.

Synopsis

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.

What Is Long-Term Care?

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:

  • Bathing
  • Dressing
  • Eating
  • Toileting
  • Transferring
  • Caring for Incontinence

Types of Long-Term Care

  1. Home Care. Family, friends, volunteers or paid professionals can give this level of care in the home. Typically this is the lowest level of care that can range from help with simple tasks to skilled nursing care.
  2. Adult Day Care. Can help home caregivers and allow people to stay in their home longer. These can include many community services including meal programs, senior centers, transportation and other services.
  3. Assisted Living. Provides 24-hour supervision, assistance, meals and health services similar to a home setting. Aides help residents with all the ADLs and provide social and recreational activities.
  4. Nursing Home. Offers skilled nursing care, rehabilitation services, meals, activities and help with all ADLs. Many nursing homes offer both temporary and long-term care.

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.

Can I Just Keep My Loved One At Home?

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.

Pros of Home Care for Loved One

  • Interaction with the family is beneficial for seniors by combating feelings of loneliness and depression that some seniors may develop over time. The natural process of aging sees senior’s friends and family slowly begin to pass away over time. Being around loved ones or family allows the senior to be around loved ones.
  • People he/she is familiar with are caring for the senior. While still home, the senior will be treated by doctors and other professionals who had been caring for him/her previously. There is no disconnect between the senior and her medical team and the history of the relationship will provide comfort that she is receiving the best care possible.
  • The cost of care will likely be lower. If the family members are doing the caring, the senior will not be spending the large amount of money that is required for in-home aides, assisted living or skilled nurse care. However, the caretaker may take on additional costs that should be evaluated before beginning any at-home care plan.
  • The senior will be in familiar residence. This is especially important when the senior is suffering from dementia or another cognitive disorder that affects the memory. Moving to a new complex or community can be hard and keeping the senior in familiar surrounding will keep them at ease.
  • You know the quality of care the senior is receiving. Everyone has heard horror stories about the care that seniors receive whether at home or in a facility. By keeping the senior at home, the level of care can be of an acceptable quality with the family overseeing who is spending time caring for the senior.

Cons of Home Care for Loved One

  • Amount of Responsibilities Increase. Depending on the level of time and care that the senior needs, you can be under an enormous level of stress both emotionally and financially. While having your loved one home is rewarding, a caregiver needs to understand the situation and have a plan to implement. The caregiver will need to dedicate significant time to the senior as the senior can feel like a burden or forgotten.
  • Loss of Privacy and Independence. This is a big life change for the senior and the caregiver. By being in the same house, the relationship between senior and caregiver can change significantly and not always for the better. Additionally, you are introducing a new element that will affect the relationships of other household members as well. The senior may feel like she intrudes in the caregiver’s home and want a more independent style of living.
  • The Level of Care needed may be significant. Unless the caregiver has medical training, the caregiver may come to a day where they will be unable to care appropriately for the senior’s ailments. Medical problems and concerns will only increase as the senior ages and these will take more and more care and time out of the caregiver’s day. In the current world of both spouses working, it is very likely to affect a caregiver’s full-time job if they need to keep taking hours off to care for the increasing medical needs.
  • The Home may need renovations. Depending on the severity and type of care needed, the senior may not be able to live comfortably in the home as currently designed. If there are mobility problems, the entrance may need to be altered or the bathrooms may have to be converted to handicap accessible. Renovations like this are very expensive and usually do not add much value to your home. Recouping the expenditures in this area will often not be likely.
  • Lack of Structure. As people age, they become more reliant on a structured environment. In a home shared with multiple people, it is unlikely there is much structure to anyone’s day. Depending on number and ages of people living in the home, the whole situation can be quite disorganized and random. A retirement or assisted living community has programmed to help seniors live a structured life and being able to socialize with their contemporaries more.

Costs of Home Care in the Erie, Pennsylvania Area

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.

  • If the senior requires 35 hours per week of home services, she will be paying more than if she resided in an assisted living facility. Home care will cost $43,225 per year while assisted living costs $42,450 per year. Additionally, the cost of assisted living went down $22.89% from 2018 to 2019 while Home Care services increased by an average of 7%.
  • Should the senior need round the clock care, the cost of home care services skyrockets to over $200,000 annually. A private room in a nursing home averages $121,000 annually, which is almost $80,000 less per year. In addition, the cost of maintaining the home will no longer be relevant which increases the difference between the two care types.

What Is Long-Term Care Insurance?

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.

Why Insure?

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:

  • Someone turning age 65 today has an almost 70% chance of needing long-term care in some form during the remainder of her life; and 20% of that same group will need long-term care for over 5 years (reference, as of September 21, 2020).
  • On average, women need care for 18 months longer than men.
  • In 2019, the average cost of a Pennsylvania nursing home’s private room was $10,098 per month and a semi-private room was $8,730 per month (reference, as of September 21, 2020).

How Much Does Long-Term Care Insurance Cost?

Many factors affect the cost of long-term care insurance for an individual including:

  • Age of applicant. The older the applicant, the more expensive the policy will be, if issued at all.
  • The lifetime maximum amount the long-term care policy will pay.
  • The maximum number of days the policy will pay.
  • The maximum amount per day the policy will pay.
  • Additional option including whether the amounts increase at a specified rate for inflation.

Also:

  • The length of long-term care insurance can vary. Common coverage periods range from two to five years, but there are policies that cover for the remainder of the applicant’s life. Lifetime benefit policies are few and far between as they are very expensive, have tighter health requirements and no cash surrender value.
  • Policies are medically underwritten, which may exclude some applicants from qualifying for a policy.
  • There will be a premium based on the factors listed above; however, this premium is subject to possible increases in the future.

What If I Never Need Long-Term Care? Will I Just Lose the Premiums?

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.

Combination or Hybrid Policies

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

Pros of a Combination Policy

  • Two different types of losses are insured: loss of money due to increased cost of care and loss of life.
  • Do not lose any of the benefit of the premium paid.

Cons of a Combination Policy

  • The same amount of premiums can purchase either more long-term care insurance or more life insurance.
  • Reduction of death benefits based on how much of the policy’s value is used for your LTC needs during life.
  • Most policies do not account for inflation or, if they do, the inflation rate may not be enough to keep up with the rising costs of LTC.
  • Usually the premium is a large payment that is either one-time or spread over a small number of years.

Examples

  1. A healthy 60 year old pays $100,000 premium over 3 years ($33,333 per year.) The man will receive a maximum monthly long-term care benefit of $5,500 for a maximum of six years. This is $396,000 of possible long-term care benefits over the six years. If he does not need long-term care benefits, his designated beneficiary will receive $138,896 in tax-free proceeds. If the man needs to use some of his long-term care benefits, that amount would be subtracted from his death benefit.
  2. A man has a $750,000 life insurance policy. He wants to attach a Long-Term Care Rider to the policy with a maximum monthly benefit of 1% of the death benefit. This will allow the man to be reimbursed $7,500 per month for Long-term care expenses. In this case, the $750,000 death benefit will be reduced dollar for dollar for any long-term care costs reimbursed. If the man required one year of long-term care before his death, the policy will reimburse $90,000 for that year’s coverage and $660,000 is received by his designated beneficiaries.

Can I Use My Retirement Account to Pay the Premiums?

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.

How Does a Long-Term Care Annuity Work?

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:

  • A Qualified annuity is funded with pre-tax dollars and the annuity payments will be taxed as income, similar to an IRA or 401K are. However, this taxable income likely is offset by the medical expense deductions.
  • A Non-Qualified annuity uses money that the tax has been paid for previously. The payments will be taxed as well, but only to the level that the annuity has grown.

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.

Options Without a Long-Term Care Policy

There are two options when it comes to paying for long-term care costs: private paying and Medical Assistance (Medicaid).

Private Pay

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:

  • Home Health Aide - $4,074 per month for forty (40) hours
  • Assisted Living Facility - $3,913 per month
  • Nursing Home, Semi-private room - $9,733 per month
  • Nursing Home, Private Room - $10,403 per month

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.

Medical Assistance (Medicaid)

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.

  • Medically Needy: An applicant must need skilled nursing care. In Erie, GECAC assesses the applicant and will issue an MA-51 form that determines type of care necessary.
  • Financial Needy: Based on the applicant’s income, the applicant’s assets must be less than $2,400 (“Institutionalized Spouse’s Resource Allowance”). If the applicant’s income is below $2,349, their resource limit is $8000. If the applicant is married, the spouse, called the community spouse (CS), is allowed to retain 50% of the couple’s countable resources up to a limit of approximately $125,000 (“Community Spouse’s Resource Allowance”). Any amount of assets over those two limitations are considered excess resources and will need to be spent down or converted to income or excluded assets.
  • Note: Countable resources are all assets owned by the couple (regardless of how titled) less certain assets, or excluded resources. Excluded resources are: one personal residence, one car, pre-need burial trusts, the community spouse’s retirement accounts, and certain other less common assets.

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?

How Can Long-Term Care Insurance Protect My Assets?

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.

Why not rely on Medicaid?

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.

Covering the Cost of Ineligibility

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.

  • Assume the monthly nursing home costs is $12,000 and the individual’s income is $2,000. Their net monthly cost is then $10,000 and their long-term care costs are capped at $600,000.
  • Therefore, a long-term care policy that pays a maximum benefit of $200,000 would cap the applicant’s long-term care costs during the five-year period at $400,000.

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.

  • Assume the monthly nursing home costs is $12,000 and the individual’s income is $2000. Their net monthly cost is then $10,000.
  • Assume the individual gives away $300,000 and purchases a Medicaid Compliant Annuity for $300,000, payable in $10,000 monthly payments for 30 months. The $300,000 give create an Ineligibility Period of 30 months; which is paid for by the annuity. Here the individual capped their LTC costs at $300,000, and protected $300,000 for their family.
  • Now assume the same facts, except the individual owns a LTC policy that pays a maximum benefit of $200,000, and the individual gives away $400,000 and purchases a Medicaid Compliant Annuity for $200,000.
  • The Ineligibility Period is longer (40 months) due to the larger gift, but paid for by the LTC insurance policy and the annuity; and $400,000 is protected for the family.

For a married couple, the Medicaid Compliant Annuity can save almost all assets and get an individual qualified for Medicaid immediately.

  • Assume a couple has $500,000 in assets and the husband is entering a nursing home. The institutionalized spouse keeps $2,400 in his name and the community spouse keeps 50% of the couple’s resource, capped at $128,640. This leaves the couple over resourced by $368,960.
  • The community spouse will purchase a Medicaid Compliant Annuity for $368,960 that pays to her a monthly income. This dollar-for-dollar transaction returns the whole amount to her. The available resources are converted to income, both spouses are under the asset limits and the husband applies for Medicaid.

Conclusion

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.