Long-Term Care Planning
What is Long-Term Care?
Long-term care is a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs), such as:
- Using the toilet
- Transferring (to or from bed or chair)
- Caring for incontinence
Other common long-term care services and supports are assistance with everyday tasks, sometimes called instrumental Activities of Daily Living (IADLs) including:
- Managing money
- Taking medication
- Preparing and cleaning up after meals
- Shopping for groceries or clothes
- Using the telephone or other communication devices
- Caring for pets
- Responding to emergency alerts such as fire alarms
Who Needs Care?
70% of people turning age 65 can expect to use some form of long-term care during their lives. There are a number of factors that affect the possibility that you will need care:
Age – The older you are, the more likely you will need long-term care
Gender – Women outlive men by about five years on average, so they are more likely to live at home alone when they are older
Disability – Having an accident or chronic illness that causes a disability is another reason for needing long-term care. Between ages 40 and 50, on average, eight percent of people have a disability that could require long-term care services. 69 percent of people age 90 or more have a disability.
Health Status – Chronic conditions such as diabetes and high blood pressure make you more likely to need care. Your family history such as whether your parents or grandparents had chronic conditions, may increase your likelihood. Poor diet and exercise habits increase your chances of needing long-term care.
Living Arrangements – If you live alone, you’re more likely to need paid care than if you’re married, or single and living with a partner.
Who Pays for Long-Term Care?
Consumer surveys reveal common misunderstandings about which public programs pay for long-term care services. It is important to clearly understand what is and isn’t covered.
- Only pays for long-term care if you require skilled services or rehabilitative care:
- In a nursing home for a maximum of 100 days, however, the average Medicare covered stay is much shorter (22 days).
- At home if you are also receiving skilled home health or other skilled in-home services. Generally, long-term care services are provided only for a short period of time.
- Does not pay for non-skilled assistance with Activities of Daily Living (ADL), which make up the majority of long-term care services
- You will have to pay for long-term care services that are not covered by a public or private insurance program
- Does pay for the largest share of long-term care services, but to qualify, your income must be below a certain level and you must meet minimum state eligibility requirements
- Such requirements are based on the amount of assistance you need with ADL
- Other federal programs such as the Older Americans Act and the Department of Veterans Affairs pay for long-term care services, but only for specific populations and in certain circumstances
Like public programs, private sources of payment have their own rules, eligibility requirements, copayments, and premiums for the services they cover.
- Most employer-sponsored or private health insurance, including health insurance plans, cover only the same kinds of limited services as Medicare
- If they do cover long-term care, it is typically only for skilled, short-term, medically necessary care
There are an increasing number of private payment options including:
- Long-term care insurance
- Reverse mortgages
- Life insurance options
Costs & How to Pay
Just as there are many kinds of long-term care services and supports, so is there a wide range of costs for them. And while some people may qualify for a public program to help pay for these expenses, most people use a variety of options, including long-term care insurance, personal income and savings, life insurance, annuities and reverse mortgages to ensure they can pay for the care they require. As our population ages, new financial products are offering even more options.
Costs of Care
Some average costs for long-term care in the United States (in 2010) were:
- $205 per day or $6,235 per month for a semi-private room in a nursing home
- $229 per day or $6,965 per month for a private room in a nursing home
- $3,293 per month for care in an assisted living facility (for a one-bedroom unit)
- $21 per hour for a home health aide
- $19 per hour for homemaker services
- $67 per day for services in an adult day health care center
The cost of long-term care depends on the type and duration of care you need, the provider you use, and where you live. Costs can be affected by certain factors, such as:
Time of day. Home health and home care services, provided in two-to-four hour blocks of time referred to as “visits,” are generally more expensive in the evening, on weekends, and on holidays
Extra charges for services provided beyond the basic room, food and housekeeping charges at facilities, although some may have “all inclusive” fees.
Variable rates in some community programs, such as adult day service, are provided at a per-day rate, but can be more based on extra events and activities
What is Long-Term Care Insurance?
Unlike traditional health insurance, long-term care insurance is designed to cover long-term services and supports, including personal and custodial care in a variety of setting such as your home, a community organization, or other facility.
Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living such as bathing, dressing, or eating. You can select a range of care options and benefits that allow you to get the services you need, where you need them.
The cost of your long-term care policy is based on:
- How old you are when you buy the policy
- The maximum amount that a policy will pay per day
- The maximum number of days (years) that a policy will pay
- The maximum amount per day times the number of days determines the lifetime maximum amount the policy will pay
- Any optional benefits you choose, such as benefits that increase with inflation
If you are in poor health or already receiving long-term care services, you may not qualify for long-term care insurance as most individual policies require medical underwriting. In some cases, you may be able to buy a limited amount of coverage, or coverage at a higher “non-standard” rate. Some group policies do not require underwriting.
Many long-term care insurance policies have limits on how long or how much they will pay. Some policies will pay the costs of your long-term care for two to five years, while other insurance companies offer policies that will pay your long-term care costs for as long as you live – no matter how much it costs. But there are very few that have no such limits.
Before you buy a policy, be aware that the insurance company may raise the premium on your policy. It is a good idea to request information on the company’s premium rate history.
What Long-Term Care Insurance Covers
Most policies sold today are comprehensive. They typically allow you to use your daily benefit in a variety of settings, including:
- Your home
- Adult day service centers
- Hospice care
- Respite care
- Assisted living facilities (also called residential care facilities or alternate care facilities)
- Alzheimer’s special care facilities
- Nursing homes
In the home setting, comprehensive policies generally cover these services:
- Skilled nursing care
- Occupational, speech, physical and rehabilitation therapy
- Help with personal care, such as bathing and dressing
Good to know: Many policies also cover some homemaker services, such as meal preparation or housekeeping as long as it is in conjunction with the personal care services you receive.
Receiving Long-Term Care Insurance Benefits
In order to receive benefits from your long-term care insurance policy you meet two criteria: the Benefit Trigger and the Elimination Period.
Benefit triggers are the criteria that an insurance company will use to determine if you are eligible for benefits. Most companies use a specific assessment form that will be filled out by a nurse/social worker team. Benefit triggers:
- Are the criteria insurance policies use to determine if you are eligible for long-term care benefits
- Are determined through a company sponsored nurse/social worker assessment of your condition
- Usually are defined in terms of Activities of Daily Living (ADLs) or cognitive impairments
- Most policies pay benefits when you need help with two or more of six ADLs or when you have a cognitive impairment
- Once you have been assessed, your care manager from the insurance company will approve a Plan of Care that outlines the benefits for which you are eligible.
The “elimination period” is the amount of time that you must pass after a benefit trigger occurs but before you start receiving payment for services. An elimination period:
- Is like the deductible you have on car insurance, except it is measured in time rather than by dollar amount
- Most policies allow you to choose an elimination period of 30, 60, or 90 days at the time you purchased your policy
- During the period, you must cover the cost of any services you receive
- Some policies specify that in order to satisfy an elimination period, you must receive paid care or pay for services during that time
Once your benefits begin:
- Most policies pay your costs up to a pre-set daily limit until the lifetime maximum is reached
- Other policies pay a pre-set cash amount for each day that you meet the benefit trigger, whether you receive paid long-term care services on those days or not
- These “cash disability” policies offer more flexibility but are potentially more expensive
Buying Long-Term Care Insurance
People with certain conditions may not qualify for long-term care insurance. Since standards vary between different insurance companies, if one company denies you, it is possible that another company will accept you. Common reasons why you might not be able to buy long-term care insurance include:
- You are currently using long-term care services
- You already need help with Activities of Daily Living
- You have AIDS or AIDS-Related Complex (ARC)
- You have Alzheimer’s Disease or any form of dementia or cognitive dysfunction
- You have a progressive neurological condition such as multiple sclerosis or Parkinson’s Disease
- You had a stroke within the past year to two years or a history of strokes
- You have metastatic cancer (cancer that has spread beyond its original site)
Insurance companies also consider other health conditions when determining your eligibility. If you buy your long-term care insurance before you develop one of the health conditions listed above, then your policy will cover the care you need for that condition.
Before You Buy
You should consider a number of things before purchasing Long-Term Care Insurance:
Don’t buy more insurance than you think you may need. You may have enough income to pay a portion of your care costs and you may only need a small policy for the remainder. You also may have family members willing and able to supplement your care needs
Don’t buy too little insurance. That will only delay the use of your own assets or income to pay for care. Think about how you feel about having care costs that are not covered. While you can usually decrease your coverage, it is more difficult to increase coverage, especially if your health has declined.
Look carefully at each policy. There is no “one-size-fits-all” policy
If you choose a policy that only pays for room and board in a facility, plan for other expenses, such as supplies, medications, linens, and other items and services that your policy may not cover
It costs less to buy coverage when you are younger. The average age of people buying long-term care insurance today is about 60. The average age of those purchasing policies offered at work is about 50
Make sure that you can afford the long-term care insurance policy over time, as your monthly income may change
Research and consider different options and talk with a professional before finalizing your decision
Don’t feel pressured into making a decision.
Where to Look for Long-Term Care Insurance
Most people buy long-term care insurance directly from an insurance agent, a financial planner, or a broker. Some important points:
- States regulate which companies can sell long-term care insurance
- States regulate the products that companies can sell
- There are more than 100 companies offering long-term care insurance nationally, but 15 to 20 insurers sell most policies
- The best way to find out which insurance companies offer long-term care coverage in your state is to contact to state’s department of insurance
Using Life Insurance to Pay for Long-Term Care
You can use your life insurance policy to help pay for long-term care services through the following options:
- Combination (Life/Long-Term Care) Products
- Accelerated Death Benefits (ABDs)
- Life settlements
- Viatical settlement
Many consumers are reluctant to buy long-term care insurance because they fear that their investment will be wasted if they do not use it. Some insurance companies have attempted to solve this problem by combining life insurance with long-term care insurance. The idea is that policy benefits will always be paid in one form or another. These products are relatively new and the features are changing as the product evolves. The amount of the long-term care benefit is often expressed in terms of a percentage of the life insurance benefit.
Accelerated Death Benefits (ADBs)
A feature included in some life insurance policies that allows you to receive a tax-free advance on your life insurance death benefit while you are still alive.
Sometimes you must pay an extra premium to add this feature to your life insurance policy. Sometimes the insurance company includes it in the policy for little or no cost.
There are different types of ADBs each of which serves a different purpose. Depending on the type of policy you have, you may be able to receive as cash advance on your life insurance policy’s death benefit if:
- You are terminally ill
- You have a life-threatening diagnosis, such as AIDS
- You need long-term care services for an extended amount of time
- You are permanently confined to a nursing home and incapable of performing Activities of Daily Living (ADL), such as bathing or dressing.
Good to know: The amount of money you receive from these types of policies varies, but typically the accelerated benefit payment amount is capped at 50 percent of the death benefit. Some policies, however, allow you to use the full amount of the death benefit.
For ABD policies that cover long-term care services, the monthly benefit you can use for nursing home care is typically equal to two percent of the life insurance policy’s face value. The amount available for home care (if it is included in the policy) is typically half that amount.
For example, if your life insurance policy’s face value is $200,000, then the monthly payout available to you for care in a nursing home would be $4,000, but only $2,000 for home care. Some policies may pay the same monthly amount for care, regardless of where you receive the care.
When you receive payments from an ADB policy while you are alive, the amount you receive is subtracted from the amount that will be paid to your beneficiaries when you die.
Key things to consider before taking advantage of an ADB policy include:
If your life insurance policy includes an ADB feature, you may be able to use your life insurance policy to help cover long-term care services. Depending on the policy amount, there may be little or no health screenings required. So if you have a health condition that might exclude you from long-term care insurance eligibility, you can still obtain a long-term care insurance policy through the ADB feature on a life insurance policy.
ADB policy payouts for long-term care services are often more limited than the benefits you could receive from a typical long-term care insurance policy.
The face value of your life insurance policy may not be enough to allow ADB payments that are enough to cover your long-term care services needs. The benefit payments may be too low and the duration may be too short to cover your long-term care services expenses.
ADB riders on life insurance policies may not offer inflation protection. If the policy does not include inflation protection, the ADB payment may not be sufficient to cover your future long-term care service costs.
If you want to leave an inheritance, you should consider whether using your life insurance death benefit to pay for long-term care services is the right option. If you use the ADB feature for long-term care services, there may be little or no death benefit remaining for your survivors.
Using the ADB option may affect your eligibility for Medicaid. Check with your state Medicaid agency for more information.
These plans allow you to sell your life insurance policy for its present value to raise cash for any reason. This option is usually only available to women age 74 and older and to men age 70 and older. You may choose to use the proceeds to pay for long-term care services.
Key things to consider before moving forward with a life settlement:
- If you sell your life insurance policy, there may be little or no death benefit left for your heirs when you die
- The process does not require any health screens; you may be in good or poor health
- The proceeds of the sale may be taxed
These plans allow you to sell your life insurance policy to a third party and use the money you receive to pay for long-term care. A viatical settlement is like a life settlement, but it is only possible if you are terminally ill. During the settlement process, a viatical company pays you a percentage of the death benefit on your life insurance policy, which is based on your life expectancy. The viatical company then owns the policy and is its beneficiary. The viatical company also takes over payment of premiums on the policy. As a result, you get money to pay for care, and the viatical company receives the full death benefit after you die.
Unlike the life settlement, money you receive from a viatical settlement is tax-free, if you have a life expectancy of two years or less or are chronically ill and the viatical company is licensed in the states in which it does business.
Key things to consider before using a viatical settlement:
- You can only use the viatical settlement if you are terminally ill and have a life expectancy of two years or less
- If you use the viatical settlement option, you do not have to satisfy the health requirements for long-term care insurance
- If you use the viatical settlement option, your life insurance policy will not pay a death benefit to your heirs
- Viatical companies approve less than 50 percent of applicants
The amount that you receive in cash from a viatical settlement is a percent of the death benefit on your life insurance policy.
If you have enough income and savings, you will need to pay for long-term care services on your own, from your incomes, savings, and possibly the equity in your home. There are a growing number of ways you can pay for your long-term care privately. This includes methods such as reverse mortgages, annuities and trusts.
A reverse mortgage is a special type of home equity loan that allows you to receive cash against the value of your home without selling it.
For most reverse mortgages:
- You can choose to receive a lump-sum payment, a monthly payment, or a line of credit
- There are no restrictions on how you use the remainder of the money
- You continue to live in the home and you retain title and ownership of it
- You are also still responsible for taxes, hazard insurance and home repairs
- However, you do not have to repay the loan as long as you continue to live in the home
- Instead, the amount you owe, based on loan payouts and interest on the loan, becomes due when you or the last borrower, usually the last remaining spouse, dies, sells, or permanently moves out of the home
To qualify for a reverse mortgage:
- You must be age 62 and older
- Unlike a traditional mortgage, you do not have to provide an income or credit history to get the loan
- The home must be your primary residence
How to apply:
You must meet with an approved reverse mortgage counselor before you can start the loan process. These counselors can help you decide whether a reverse mortgage is right for you
- You must use the funds your receive to pay off any existing mortgages or other debt against your home and to make required home repairs
- As long as you spend the payments you receive in the month that your receive them, the money is not taxable and does not count towards income or affect Social Security or Medicare benefits
- Does not count as income for Medicaid eligibility
- Once you have a reverse mortgage, it is very difficult to borrow any more against your home. But you can refinance a reverse mortgage if the house increases significantly in value.
- If your heirs want to keep your home, they can repay the reverse mortgage. They can also keep the difference if the home’s sale price is greater than the reverse mortgage loan balance when they repay the loan.
You may choose to enter into an annuity contract with an insurance company to help pay for long-term care services. In exchange for a single payment or a serious of payments, the insurance company will send you an annuity, which is a serious of regular payments over a specified and defined period of time. There are two types of annuities:
- Immediate annuity
- Deferred long-term care annuity
If you have an immediate long-term care annuity, the insurance company will send you a specified monthly income in return for a single premium payment.
This option is available regardless of your current health status. If you do not qualify for long-term care insurance because of age or poor health or if you are already receiving long-term care, you can still purchase an annuity.
The insurance company converts your single premium payment into a guaranteed monthly income stream for a specified period of time or for the rest of your life. How much you receive in income each month depends on the amount of your initial premium, your age, and gender. Since women tend to live longer than men, women generally receive a smaller monthly payment over a longer period of time than men of the same age.
Key things to consider before purchasing an annuity:
- The annuity amount you receive may not be enough to pay for your long-term care expenses
- Inflation may reduce the value of the monthly income you receive from the annuity
- The effect that annuities can have on your taxes is complicated. Consult your tax professional before purchasing one.
Deferred Long-Term Care Annuity
These plans are available to people up to age 85. Similar to other annuities, in exchange for a single premium payment, you receive a stream of monthly income for a specified period of time.
The annuity creates two funds: one for long-term care expenses and another separate fund that you can use however you desire.
You can access the long-term care fun immediately, but you must wait until a specified day in the future to access the separate cash portion. The rules of the annuity define how much you can access on a monthly basis from the long-term care fund and how much you can access on an annual basis from the cash fund. To qualify for a deferred long-term care annuity, you must satisfy some health criteria.
Some things to consider before purchasing a deferred long-term care annuity:
- If you do not use the long-term care fund, you can pass it on to your heirs
- The annuity may not be enough to pay for your long-term care expenses
- The long-term care portion of the annuity may satisfy the requirements for a tax-qualified long-term care policy
- The effect that annuities can have on your taxes is complicated. Consult your tax professional before purchasing one
- An annuity can affect your eligibility for Medicaid, and whether Medicaid will pay for your long-term care services.
A trust is a legal entity that allows a person (the trustor) to transfer assets to another person (the trustee). Once the trustor establishes the trust, the trustee manages and controls the assets for the trustor or for another beneficiary.
You may choose to use a trust to provide flexible control of assets for the benefit of minor children. Another common use of a trust is to provide flexible control of assets for an older adult or a person with a disability, which could include yourself or your spouse. Two types of trusts can help pay for long-term care services:
- Charitable Remainder Trusts
- Medicaid Disability Trusts
Charitable Remainder Trusts
This trust allows you to use your own assets to pay for long-term care services while contributing to a charity of your chose and reducing your tax burden at the same time. You can set up the trust so that you receive payments from the trust to use for long-term care services while you are alive.
When you die, the balance of the funds in the trust goes to the charity that you selected. Since you are making a charitable donation, you can receive tax deductions for the fair market value of the assets that go to your chosen charity.
Key things to consider before setting up a charitable remainder trust:
- The amount of money available to you to use for long-term care services is based on the amount of your donation. These payments are only likely to be large enough to help pay for long-term care expenses if you donate a substantial amount of money to the charity
- The donation may affect your Medicaid eligibility
Medicaid Disability Trusts
These trusts are limited to persons with disabilities who are younger than age 65 and qualify for public benefits. Parents, grandparents, or legal guardians often set up these trusts to benefit persons with disabilities and a non-profit organization manages the assets. This is the only kind of trust that is exempt from rules regarding trusts and Medicaid eligibility.
Key things to consider before setting up a Medicaid Disability Trust:
- If a beneficiary with a disability receives Medicaid benefits, the state can recover any amount remaining in the Medicaid Disability Trust when he or she dies
- The tax implications for Medical Disability Trust are complicated. Consult a tax professional before establishing a Medicaid Disability Trust.