This is a question I get from time to time from estate planning clients, and an item I suggest that every client at least take time to consider. It’s not for everyone, or every stage of life, but it can be a valuable tool in the estate and financial planning toolkit.
What is long-term care?
The term long-term care (“LTC”) describes the range of services provided to help a person with daily living activities, including bathing, dressing, eating, toileting and related needs, and transferring. Most LTC services aren’t medical but LTC may include help with administering and keeping track of daily medication requirements. LTC is appropriate for people who are unable to care for themselves either indefinitely, as for a senior with dementia, or for a long period, such as a person recovering from major surgery or injury.
Where is long-term care provided?
Long-term care may be provided in the person’s home or in a facility such as a nursing home or assisted living center.
I don’t need LTC and may not for years. Why should I be concerned about this?
Statistics show that around 70% of adults aged 65 and older do need some manner of LTC for some time period. The longer we live, the more likely we are to develop dementia or some other condition which limits our ability to care for ourselves and leads to the need for LTC. As the average life expectancy continues to rise, that percentage will continue to go up as well. In short, if you’re not yet to a stage in life when you need LTC, if you live long enough, you’ll probably get there.
Is LTC expensive?
Generally, yes, though of course costs vary by location, nature, and duration of need. While cost varies according to level of care, median national annual costs of care at assisted living centers and nursing homes average over $40,000 and $85,000/year, respectively. Home-based care, which is what many people prefer, if possible, can be even more expensive.
How is LTC paid for?
In the absence of an LTC insurance policy, in one of two ways:
- Self-pay. That is, you pay out of pocket from your own assets, until you are no longer able to do so. Then…
- Medicaid. Once a person has “spent down” their assets, he or she may qualify for Medicaid. Once approved for coverage, Medicaid will pay for LTC. (Note that a person may retain some “non-countable” assets such as primary residence and still qualify for Medicaid, though the Medicaid Estate Recovery Program may later recover against the assets after the person’s death…a much longer topic for another day)
Doesn’t Medicare cover all my costs once I get older?
This is a common misperception. While Medicare covers many costs for seniors, it does not cover long-term care (see the official Medicare handbook). Medicare may pay for up to 100 days of skilled nursing care, but does not cover LTC needs beyond that point. Remember, most LTC isn’t specifically medical in nature, but rather assists with activities of daily living.
Ok, so going back to Medicaid. Are there any limitations on the care that Medicaid will pay for?
Yes. While a full discussion of Medicaid LTC is beyond the scope of this post, because Medicaid reimburses providers at a lower rate, many facilities have only a limited number of “Medicaid beds” (and may have a waiting list for them), and the most luxurious and well-appointed assisted living facilities may not accept Medicaid at all. Medicaid coverage only applies with providers that accept it, so your options are limited to those facilities.
So those are the options if you don’t have LTC insurance. What is LTC insurance?
A long-term care insurance policy is a policy you purchase ahead of need that will pay for your LTC needs in the future as you age. Coverage varies by daily benefit, total benefit, and timeframe. In general, the older the policy holder and the longer and more extensive the coverage, the more expensive the premiums.
What features do LTC insurance policies have?
Policies may include inflation protection guarantees which limit the amount by which your premium can increase from one year to the next. Some policies are tax-qualified, which means that you may be able to deduct part of the premium from your taxes as a medical expense.
A particularly valuable option for some clients is a Texas Long-Term Care Partnership-qualified policy. Such policies provide dollar-for-dollar asset protection in the event you use up your full benefit and later need to spend down for Medicaid. For example, if you purchase a $500,000 policy and use the full $500,000 in coverage but still have LTC needs, $500,000 of your assets are exempted from being subject to Medicaid spend-down, which means those assets are available to pass on to loved ones or use for other purposes.
Is LTC insurance expensive?
The cost depends on the type and amount of coverage you want and your age and health, and varies by provider. And of course, policies with inflation protection, tax-qualifying, or asset protection features will cost more than policies without such features.
What happens if I buy a policy and die before I use up my benefits?
Generally, the same thing that happens if you buy homeowners insurance and don’t need to make a claim during the year: you don’t get your money back. What you do get during the time the policy is in effect is the peace of mind of knowing that if something happens, you’re covered. Which, depending on your circumstances and wishes, may or may not be of value to you.
Okay, so given all of that, who is long-term care insurance a good fit for?
In a nutshell, it’s good for people who are likely to live long enough to need LTC, who have family history of dementia or similar conditions which suggest high likelihood of needing LTC, and who want to ensure they’ll have the highest quality of LTC without depleting their assets to afford it.
Let’s unpack that a bit. First, by looking at the opposite.
Who isn’t LTC insurance a good fit for?
No expected LTC needs: First, LTC insurance doesn’t make sense for a person who doesn’t expect to have long term care needs of significance. For a person in poor health, expected LTC needs may be minimal. And for someone already on the far end of the life expectancy chart, regardless of health, it becomes increasingly unlikely that you’d need care long enough to make it worth a policy (and of course, buying at such an advanced age would come with an exorbitant premium). The key here is the lack of a long term planning horizon.
Minimal assets: Second, LTC insurance isn’t appropriate for someone with minimal assets. Not only will this person likely spend their way down to Medicaid eligibility fairly quickly once need arises, but when they weigh the cost of premiums against the value of the assets they’re trying to protect, it may be a wash. For someone with minimal assets, spending down and then relying on Medicaid is the most appropriate option.
Substantial assets: Third, if someone has significant assets and is willing to spend them in order to pay for their care, they don’t need LTC insurance. Put another way, they have sufficient assets to pay for the level of care they want, and are willing to do so.
So looking at the list of who might want LTC insurance again…
Let’s say that you have the assets to pay most or all of your own expected care needs but want to preserve those assets to pass along to children, grandchildren, or a favorite charity. The thought of all of your life savings going to a nursing home instead of to family frustrates you, and of course, if you deplete those assets, you then have to rely on Medicaid which may not meet your desired standard of comfort. You see a LTC policy as allowing you to pay your LTC expenses ahead of time, maybe even while you’re still working, in order to avoid having to deplete your assets later.
Now, let’s say you’re also someone in pretty good health and longevity runs in your family. You have a reasonable expectation of living into your 70s and beyond. And because the likelihood of needing LTC increases the older you get, you realize that that also means your likelihood of needing LTC is fairly high. Add in a family history of dementia or similar condition, and the scales tilt further still.
In short, you expect to live long enough to need LTC and you like the idea of being able to have home-based care and then, if you have to go to assisted living, be able to go to the nicest and most luxurious facility available. And you want to do that while passing on as much of your savings as possible.
If that sounds like you, then you may be a good candidate for LTC insurance.
Okay, that sounds like me. So should I apply right away?
Personally, I’m an excellent candidate for LTC insurance, but I haven’t signed up yet and won’t any time soon.
Why? I’m still young for it. It’ll be something to look into again around the late 40s-early 50s timeframe. My need is still remote and far enough off that there’s no need to buy now, and even in 10 years I’ll still be young and, presumably, healthy enough to qualify for reasonably favorable premiums.
How late is too late? My grandmother bought a policy around age 80 and still managed to end up in the black on it living to age 92, but I wouldn't recommend that approach to anyone now. She managed to have the fortune of buying an undervalued policy and then living well beyond expectancy to use a high amount of benefit.
Insurance companies have realized in recent years that their previous actuarial assumptions and assumptions about interest rates were off and, after losing money, have reformulated their policies accordingly. The bad news is that costs are now higher for relatively less generous benefits. The good news is that a policy purchased now is less likely to see large premium increases down the line than one purchased when they were operating under overly rosy forecasts. (Some offer premium increase protection guarantees, though of course at a cost.)
So…when should I look into this?
I’d suggest that it should merit consideration around age 50. Maybe not for immediate purchase, but at least discussion with a financial planner about if and when it might make sense. It should at least be on the radar at that point.
What are the risks of waiting too long?
The biggest risk is that you develop a disqualifying condition such that you aren’t able to get a policy. For example, once you’ve been diagnosed with Parkinson’s disease or Alzheimer’s, you probably won’t be able to find an insurer who will cover you. Yet if you had purchased coverage before diagnosis, you’d get to keep the policy and they couldn’t drop you, so long as you continued to pay your premiums. I have a relative in that situation and unfortunately, while an LTC insurance plan might have been a good fit for her, the window of opportunity to purchase has closed.
That risk aside, the consideration for most people is that the longer you wait and the older you are, the higher your premiums will be. Remember, insurance is about actuarial odds, and the older you get, the higher the odds of your needing LTC.
Are there other ways to protect assets from LTC costs?
For example, some manner of irrevocable trust-based planning might also achieve that end. That’s another discussion for another day, but it’s worth noting that there are some limitations, most notably Medicaid’s 5 year lookback provision. And, some clients may be uncomfortable with the idea of relinquishing ownership and control of assets to a trustee, even if they remain the beneficiary.
For those seeking specifically to qualify for Medicaid there are specific strategies to place funds into non-countable assets to protect them.
How do I decide what’s best for me?
As with all matters of estate planning, planning for long-term care needs is not a one size fits all process. Your best bet is through discussion with professionals who can advise you of your options based on your specific circumstances and wishes. Your estate planner can help you evaluate how LTC insurance might fit into your planning goals.
Also, take advantage of resources like ownyourfuturetexas.org, which can provide further information about LTC insurance and direct toward insurers and other resources.