How Should You Pay for Long-Term Care?
Written By: Ryan Rink, CFP®, ChFC®, CLTC®
As financial advisors, we often get asked how clients should go about paying for long-term care expenses. There is not one broad answer that applies to everyone, so we will run through a variety of different funding options.
Self-funding, or ‘self-insuring,’ is exactly what it sounds like – you plan to draw from your savings or retirement assets to pay for your long-term care needs. This strategy typically works best for those with high amounts of assets and/or have excess income. One of the biggest risks with this strategy is the need to liquidate assets at a faster rate than anticipated, which in turn could reduce future income for the other spouse. Tax consequences are another important factor to consider – withdrawing large amounts from pre-tax accounts (IRA, 401(k)) in one tax year can substantially increase taxes owed.
Some clients have told us that Medicare will pay for their long-term care expenses. In reality, Medicare Part A will cover only up to 100 days in a skilled nursing facility. The first 20 days are fully covered, and the next 80 days require a daily deductible of $194.50 (2022). Anything past the 100-day mark would be your responsibility.
Medicaid should really be viewed as a last resort. It is designed specifically for those with a limited amount of assets and requires individuals to meet strict income eligibility requirements to qualify for coverage. It is important to keep in mind that Medicaid will not pay for home care, adult day care or assisted living.
Common Long-Term Care Insurance Solutions
Traditional Long-Term Care Insurance
One solution is traditional long-term care insurance. Think of this insurance like your auto insurance policy – you pay the premiums each year and hope to never use it, but it will payout in the event something does happen. This is the most common type of long-term care insurance our clients choose to purchase. This is because it is generally the best ‘bang for your buck,’ meaning that you can get the highest amount of insurance for the least amount of cost. You can customize the elimination period (the period of time that must pass before the policy pays out benefits), benefit amount, benefit duration and inflation rider. You can also ‘pool’ (combine) benefits with your spouse, meaning that if you pass away without collecting the full amount on your policy, your benefits can then be used for your spouse.
The biggest caveats for traditional long-term care insurance include:
- There is no return of premium if you die without using the benefits.
- There could potentially be future premium increases.
Life Insurance with Long-Term Care/Chronic Illness Rider
Another solution is life insurance with a long-term care or chronic illness rider. This involves purchasing a permanent life insurance policy that allows access to the death benefit while the person is alive to pay for long-term care expenses. Also, if you end up not using the long-term care benefit, or only use a portion, your spouse/children will inherit the remaining death benefit tax-free. This can be a great option for those who have built-up cash value in an existing whole life or universal life insurance policy.
Consider the following example:
John is 60 years old and no longer has a need for life insurance. He has paid into a whole life insurance policy over the majority of his working career. The policy currently has a cash value of $50,000.
He could now apply for a new life insurance policy with a long-term care rider and use the $50,000 from the existing whole life policy to fund the new policy. This could then substantially reduce his premiums on the new policy and would provide him with some long-term care coverage.
The biggest caveats to this form of insurance include:
- Typically, there is no inflation rider.
- It is usually more expensive than traditional long-term care insurance.
- You can be approved for the life insurance but declined for the long-term care rider.
We have now gone through a variety of funding options, but which one is right for you? The answer depends on your comfort level, as well as your individual financial and health circumstances. The most important step someone can take is to put a written plan into place. It is best to communicate this plan with your spouse and children, so everyone is on board if something does happen.
If you have specific questions regarding long-term care, reach out to your Shakespeare advisor at 262-814-1600.