More of us find ourselves facing health care decisions for ourselves, our parents or loved ones regarding whether to provide assistance in the home or in a group facility. About 40% of people reaching age 65 will eventually need Long-Term Care (LTC). As you reach your mid-80’s the rate is much higher. A question you have to ask yourself is how you want to receive your care and how much control you want to have. Funding home health care is critical to all of us!
As medical advances help us living significantly longer, more and more of us will find ourselves in a position that requires home health care. This care can require either medical or non-medical assistance. Medicare only covers short-term, prescribed home health care for certain services. Typically, after 100 days of Medicare assistance, you are required to pay your own way. This is why many LTC Insurance policies have a 90-day deductible to prevent a lapse in coverage between potential Medicare coverage and self-coverage.
Non-medical care in Arizona averages over $22/hour. To make the math simple, let’s assume a cost of $20/hour. That equals $480 per day and $14,000 per month for full-time care. If you are just wanting 4 hours per day it drops to a paltry $2,400 per month. That is more than most house payments.
My goal with this writing is to discuss and inform on potential ways to fund home care. In an effort to keep this of reasonable length, I’m only listing some of the pros and cons of each. The decision on which is best for any situation is a personal one based upon each individual’s financial situation. This is why I suggest you work with a financial advisor knowledgeable in all aspects of the topic.
A list of the major potential funding mechanisms and a non-exhaustive discussion of each follows:
LONG-TERM CARE INSURANCE
(LTCi) can assist with these payments. If you bought the policy since 2000 and if you need assistance with at least two ADL’s, it is likely that home health care is covered. It is unlikely that it can cover more than part of your costs. The reason is that most coverages considered group setting rather than home care. Group settings are much less expensive to provide assistance. Regardless, only about 7.5% of care (of any kind) will be covered by insurance. LTCi Statistics. Most benefits are tax-free as well.
- This is a form of health insurance that is specific to LTC needs. If you have a policy and are deficient in 2 of 6 Activities of Daily Living or have dementia, these benefits will begin payout after the contractual deductible period. Many modern policies pay for home care. Many older policies do not pay for anything below a nursing level of care. If you have a policy and it covers home care, you should use it immediately. After years of the insurance company getting into your pocket, it makes no sense to “wait until later”. This is the time to get into the insurance companies pocket! If you have this kind of insurance. Use it!
- Benefits Modern policies can provide a significant benefit to supplement your home-care needs. Some policies have cost of living increases and can provide quite a nice monthly base against expenses. Also, in certain circumstances, a portion of your premium might be deductible. Talk with your tax accountant.
- Drawbacks: There will be a waiting period on the policy before it takes effect. Commonly 90 days, it could be quite a bit longer. The policy may reimburse expenses or it might provide indemnity. This could affect your payout.
If you do not have LTCi (and few do own policies) or your benefits have run out or the benefits do not fully cover your needs, you shall be funding the balance of care from your assets. Assets refer to basically anything with a potential cash value. Here is a list of common assets and information on how to use them wisely:
Yes, your home is a countable asset in any calculation. There are a couple of potential ways to access this asset’s value. One is to sell your home and move into an apartment or with relatives. This could potentially fund care for many months. The second method would be a Reverse Mortgage. With a reverse mortgage, you can either take a lump sum or monthly payments. Again, consulting a financial advisor with no direct benefit from the mortgage is a great option.
- BENEFITS: A home is often a person’s largest asset and may represent your largest pool to draw upon.
DRAWBACKS: Selling your home defeats the purpose of having care delivered in the place you are most comfortable. While a reverse mortgage allows you to stay in your home, it doesn’t give you access to 100% of the value of your home.
This would include bank savings, CDs, collectibles, brokerage accounts, etc. Generally, taxes have been paid on this money and after a “rate of return” analysis, we can determine exactly what you need to earn and fund care without drawing the account down. Or, how long the accounts will last at your expected rate of expenditure.
- If Mrs. Jones was earning 5% on her accounts and using $5,000 a month for home care, she would need at least $1,200,000 in her accounts to fund care from her earnings alone. If that $1.2 is in CD’s at 1% the calculation obviously changes. She will be spending the corpus of her accounts at $4,000/month in the beginning. Remember, the cost of care increases over time.
- Under the same scenario, if Mrs. Jones only had $400,000, her savings would be exhausted in 97 months or just over 8 years.
- BENEFITS: You remain in control. If nothing changes the outcomes are easily calculated and the financial advisor knows the rate of return required to protect both the client and their accounts. Also, this money would have already been taxed and not require extra money for taxes be withdrawn to meet your monthly needs.
- DRAWBACKS: If you do not have enough money in the beginning, it requires an unreasonable rate of return to protect the account and client. This will put you into a spend-down of your accounts and possibly into Medicaid at some point. Believe me, you do not want to have yourself or a loved one in Medicaid if it can be avoided.
IRA’S AND OTHER QUALIFIED ACCOUNTS
These accounts can be held in any of the account types listed under savings. The difference is that this money has never been taxed and will be upon withdrawal from the account. As with the previous example, a “rate of return” analysis should be conducted to determine the necessary return required to meet your needs.
- BENEFITS: This is often a great place to withdraw money for care. If care is medically necessary, it should be at least partially deductible on your federal and state returns. Because of this, your taxes owed may be offset by medical expenses. This can be quite positive for heirs if there will be an estate remaining. It is much better to inherit a regular savings account than an IRA.
- DRAWBACKS: If your expenses are under 10% of your adjusted gross income, there is not going to be a federal deduction.
Annuities can be either qualified or non-qualified. As a contract between you and the insurance company, they each have different rules, but they also have commonality.
- Living Benefits are an income benefit that pays for either a period or guaranteed for your life. Some are a “withdraw” benefit and others require annuitization. Each contract is different and should be analyzed by a professional.
- Critical Care Benefits are benefits (usually a rider) that can be applied if you go into care. Each has a different value and triggering mechanism. When triggered, these often allow you greater free access to your principal. Some require only ADL’s and others require that you are moved into outside care. Again, evaluation by a professional is your safest route.
- ANNUITIZATION is in effect the creation of a pension with your annuity assets. You give your asset to the insurance company and the insurance company guarantees you a payout (pension) for either a period of years, life or joint lives. Contact an advisor for your best choice and to be given further explanation.
LIFE INSURANCE WITH LTC BENEFITS
A few companies have designed life insurance products around a LTCi base.
- Pure LTC based universal life policies guarantee you a base amount of both life insurance and LTC insurance. You are usually guaranteed your full premium back at death (life insurance) and a leveraged amount for LTC that goes up over time. These are complex and mostly based upon age, sex of the applicant and time that passes between purchase and use.
- Rider base LTC policies are very common. They allow access to a portion of your death benefit for LTC purposes. An example might be 2% of the death benefit per month until the policy is exhausted in about 50 months. These are a good way to hedge a death benefit against potentially needing care. Many of these are good for home care.
ALTERNATIVE INSURANCE BENEFITS
- LTC Annuities are annuities that leverage your annuity deposit. Each one is different, but most pay the LTC benefit at a stated monthly rate over a stated period. Example: $1500 per month for 36 months. Many contracts increase the rate of payout the longer you have your money held in the annuity.
- LTC Annuity Benefits are a particular benefit that might double your annuity payout during the time you are in care for between 5 years and life.
- Life Insurance Critical Care Benefits. Some life insurance policies are designed to fund LTC from early withdrawals from the death benefit and others are designed specifically to be LTC vehicles. Either is a great source of LTC funds.
LONG-TERM LIFE CARE BENEFITS
- These benefits are relatively new to the long-term care arena. Life Care Benefits are benefits gained from selling your life insurance policy (either term policies or whole life) to a company that deposits the purchase price into an escrow account held in your name. This account can only be used to pay for LTC needs. You will have to talk with a specialist.
I cannot reiterate enough that it is critical for you to work with a skilled and knowledgeable advisor. One with experience in all aspects of creating LTC income and who understands your goals and needs. The analysis is one of funding mechanisms, not selling products.
You should never call an insurance company without the assistance of a professional. You may believe that you are asking the correct question, but often you are not. Because of liability, the company will answer the question you ask rather than guide you to the questions you should ask.
Feel free to contact me and I should be able to put you in touch with a specialist in your area.