With people living longer lives and with the cost of health care increasing much faster than people’s ability to save, the need for some kind of funding mechanism for long-term health care is obvious. There are several ways to fund an extended care event:
- Long-term care insurance
- Government programs
- Asset-based long-term care insurance
Long-term care insurance can be a great way to prepare for extended care—if care is needed. The odds are if you live beyond the age of 65, you’ll have a 70% chance of needing care at some point in your life. An estimated 58 percent of women and 44 percent of men will need nursing home care at or after age 65. The problem is that we have no way of knowing if it will, at what age and for how long. Many don’t like idea of paying for something they may not need and qualifying for coverage can be a challenge. Long-term care insurance also brings the possibility of future premium increases which can make this solution hard to budget for in retirement.
Government programs are limited in coverage. Medicare/Tricare only provides rehabilitative services. It does not pay for long-term care. Medicaid is a government program that does pay for long-term care, however, it is needs-based. Benefits can vary from state to state and you must first spend-down you own assets before qualifying. In addition, popular care options like your home and assisted living care may not be available. In the end, there is also a loss of choice and control.
If you haven’t prepared for extended care or do not feel the need to, what you are doing is called self-funding and the question to ask yourself is, “If I were to need care, which of my assets would I liquidate first”? This means that if there is an extended care need, you will bear the entire cost and risk and your loved ones will have no choice but to get involved. Assets can be set aside “just in case”, however the problem is not being able to know how much is “enough”. Some people can afford to absorb the cost of a few years of care, but what if the need becomes catastrophic? What if care lasts 8 years, the average length of claim for Alzheimer’s or Dementia?
More and more people are finding better solutions in an option called asset-based long-term care insurance. Think of these policies as owning rather than renting. It combines the benefits of life insurance or annuities and long-term care insurance. Although each policy has its own features, the idea is that if you don’t use the money for long term care costs, this passes on tax free to your beneficiary. Premiums are guaranteed never to increase and an exit strategy allowing return of premium if you need to get out of the plan. These plans care be shared by a spouse/partner/family member and offer unlimited/lifetime benefits. Also, because this is a life insurance policy based on mortality, underwriting is not as stringent as traditional long-term care insurance which is based on morbidity.
A 57-year-old woman could take her $100,000 and leverage it through the purchase of life insurance or an annuity to provide a multiple of $100,000 if she ever needs long term care. In the past, these policies were typically funded through a single premium but these days there are various payment options; you can choose from a single premium, limited (10 or 20 pay) or continuous pay model like traditional long-term care insurance. You can also use qualified (401k, 403b, IRA) or non-qualified funds which makes a compelling case for why individuals should consider protecting their nest egg. These plans are also Pension Protection Act Tax Qualified so if you have an old cash value life insurance policy, you may be able to exchange for a long-term care plan. IRC section 1035 exchange enables the policyholder to postpone the recognition of that gain and long-term care benefit payments are income tax-free. The policyholder’s cost basis in the new policy becomes the transferred basis plus any future premiums paid.
Regardless of the path you choose, it’s important to be prepared for an extended care event. The good news is there are expanded alternatives and more guaranteed, efficient solutions than ever before. Having a plan preserves your ability to keep financial commitments by providing another source of income to pay for care and allows you to remain safe at home while mitigating the emotional and physical consequences of providing care. November is Long-Term Care Awareness Month. I encourage you to review your financial goals and think ahead about how you and your family would want to manage a long-term care situation.
Allison Payne, CLTC
Long Term Care Specialist, ACSIA Partners
Tags: Retirement, Long Term Care, Planning, Hybrid, Asset-Based