Let me tell you something: you don’t have to buy long-term care insurance. Some people are adamant about it but frankly it’s not necessary for every single person. It may be that you never need long-term care insurance.
It is estimated that around 70% of people who reach age 65 will require long-term care for at least a period. The problem with this is that we don’t know how long you will actually need long term care. It may be that you only need it for a few months! On the other hand, my late grandmother needed it for 6 long years!
So since we can’t predict the future, long-term insurance is one way to protect against the high cost of long-term care. However, this form of insurance may not be suitable for everyone. Which is why today I want to talk about 8 different ways to cover your long term care costs. And be warned, you may not like some of these options, and if so, that’s fine, just cross it off your list.
I’m going to start with the four main, traditional ways of being paid for. Later on, I’ll discuss four alternative options:
- Out of Pocket: If you’ve enough resources, you may be able to pay for your long-term care needs with money you’ve saved or invested. You need to consider your stable income like social security, pensions, rental real estate, equity in your primary home, as well as your cash savings and investments. If something goes wrong with your health and you need to pay a large amount for long term care, will you financially be okay?
- Medicare: Many people don’t realize this but Medicare really doesn’t offer much in the way of long term care needs. Medicare does cover short-term nursing home stays after an accident or condition that necessitates hospitalization. Medicare covers up to 100 days of “skilled nursing treatment” per disease or illness, per benefit period. After 100 days, you will be required to pay 100% of the costs out of pocket.
Once you are out of the facility, the benefit period ends when you haven’t gotten any inpatient hospital care (or skilled nursing treatment) for 60 days in a row. Once that has been met, then you are eligible for a new benefit period and the new 100 days. However, if this is a continuing health circumstance, then this isn’t a viable option for you.
- Medicaid:
If you run out of assets and still need long-term care, then Medicaid would offer you programs and support to get you the care you need. Medicaid is a program run by the federal government and each specific state.
Now I won’t sugar coat it: relying on a government program to take good care of you when you need help the most isn’t a plan I love.
There may be service delays in getting care you need, and the quality of service may not be as good as privately run facilities. Further, the options you would have through Medicaid would be severely limited compared to private options.
Medicaid also requires you to have limited resources. A nursing home resident may have $2,000 in “countable” funds to be considered for Medicaid coverage, although it may be higher in some states. Further, these is also a monthly income limit that depends on your state, but it isn’t very high. So if you’ve got a lot of assets, this likely won’t be a good option for you. But if you don’t have much in the way of assets or income, then this absolutely could be an option for you.
- Long-term care insurance: Long-term care insurance needs you to pay monthly premiums to purchase a plan that pays your long-term care costs if you are admitted to a nursing home or need home care (based on the policy). We’ve discussed these in a previous blog so I won’t spend a lot of time on this option in this post.
Long-term care insurance rates vary significantly based on the age when you buy the policy, the payout length, and the quality of benefits, among other factors, but they can be costly.
It’s still the most cost-effective when bought before the age of 60. According to American Association for long-term care insurance, the average annual premium for a healthy couple both 55 years old in 2020 would be $3,050. The longer you wait, and the more expensive your specific location, the higher your costs will be.
Further, these traditional long term care policies function much in the way that car insurance does: You pay for it every month, and if you don’t use it, then that premium payment is gone. So while it’s good that physically you won’t need any long term care (since you are healthy), you can’t get that money back.
Because of the clear downsides with these long term care insurance policies, a lot of people look for other options to pay for their long term care needs, and I’ve put together four of them that you can consider:
- Short-Term Care Insurance:
Short-term care insurance, also known as convalescent insurance, is a policy that provides medical benefits for one year or less. Short-term policies typically cover home care, assisted living and nursing homes when you can’t take care of yourself.
The rates are typically lower than conventional long-term care coverage plans because the insurance providers are not required to make a long-term pledge. For a 65-year-old, the average short-term care rate is $105 per month, and the daily benefit can range from $100 per day (or $3,000 per month) to $200 per day (or $6,000 per month).
Many candidates who are turned down by standard long-term care policies may be approved by short-term care insurance because the costs are cheaper and the coverage is only for a year or shorter.
These policies have limited to no elimination cycles, encouraging people who need to receive coverage right away.
- Critical Care or Critical illness Insurance:
People who are diagnosed with cancer, stroke, heart attack, or other significant diseases may purchase critical care or critical illness insurance, which provides lump-sum cash compensation when one of those critical illnesses arises in someone’s life.
For instance, let’s say I have critical illness insurance, and I have a stroke. Once that is approved by the insurance policy, then my policy pays out a lump sum of, say, $100K, and then my policy is terminated. So there’s nothing ongoing after that, and all expenses I incur after that will be up to my health insurance coverage as well as paying for it out of pocket, assuming I don’t have long term care insurance. But on the bright side, I’ll have $100K to help me pay for those costs.
Of course, this is not a replacement of long term care, as it simply won’t cover as much in terms of illness that long term care will. You will need to look through the specific policy to see what exactly is covered and what isn’t.
- Annuities with Long-Term Care Riders:
Annuities are complex, so we won’t get into all the details today. But an annuity is a contract that you enter into with an insurance company, where you hand them money (either up front or in a series of payments) and then they agree to pay you some amount now or in the future, based on the policy details.
That out of the way, there are some annuities that you can add on a long term care rider onto the annuity, so that if you medically need long term care, then you can use payments from the annuity to cover your long term care needs.
However, unlike long term care insurance, payments from a long term care rider in an annuity will be taxable. If the annuity is inside of a tax deferred account (like an IRA), then the whole amount is taxable. And if it’s in a taxable brokerage account, then the earnings on that annuity are taxable.
One benefit to this though is that if you are turned down by conventional long-term care insurance companies, it is typically less restrictive medical underwriting, which makes it easier for this to be accepted and added onto your annuity.
When the annuity owner passes away, the proceeds (if there are any) are distributed to the beneficiaries, minus any withdrawals for long-term treatment.
- Life Insurance With Long Term Care Rider:
These policies work in similar ways to an annuity with the long term care rider. Let’s say that you decide to purchase a life insurance policy that has the option of a long term care rider. You can either make a large single premium payment, or make installment payments over a number of years. From there, the policy you choose will pay out a certain amount of death benefits when you pass away, and it will also have the ability to cover long term care needs, up to policy limits.
Now, the policy’s death benefit WILL be reduced if you use your policy for your long term care needs, depending on how much you use. To make this easier to understand, let me share an example from Lincoln Financial’s MoneyGuard II policy. And it should go without saying, but this is not an endorsement, just an example:
A 60-year-old female nonsmoker pays a single $100,000 premium for up to $453,783 in long-term care benefits, or almost 4.5 times the premium. Long-term care benefits could pay out for up to six years, at up to $6,303 per month. If she never used the policy for long-term care, it would pay a death benefit of $151,261 to her beneficiary. And after year five, she could get her $100,000 back if she didn’t want the policy any longer and hadn’t used any of the long-term care benefits.
Putting It All Together
Wow, so we’ve covered a lot today. We covered the four main, traditional, most talked about ways to cover your long term care needs, and then we talked about 4 alternative options. To recap, the traditional ways are: a long term care insurance policy (pay as you go), using Medicaid once assets are drawn down significantly, using Medicare for a very temporary period, and paying it out of pocket.
And the alternative options I presented are: buying short term care insurance, critical care insurance, buying an annuity with a long term care rider, or buying a life insurance policy with a long term care rider.
As we leave today, I want you to do two things. First, do yourself a favor and play around with the Genworth long term care costs, and you will see the cost of long term care by your state. It’s the best tool I’ve seen to see the average cost of long term care.
My second thing to ask of you is if you want to learn more about long term care, I highly recommend you seek out an insurance expert who can help you get quotes on the policies listed above. There’s nothing better than seeing these costs in action in your own life, given your own health and history. So that’s all we have for today, I will see you next time.