Options for Long-Term Care Planning

An older couple I know has been caring for their mother (in-law) with Dementia for more than two years. She recently finished her race. I know that caring for their mom so faithfully during these years has been an honor and a blessing to them (as much as a struggle at times I am sure), but many children are not in such a position to care for an elderly parent. A study from Versta Research found that 69% of surveyed Americans do not believe that they would be able to take care of a family member who needed long term care. Furthermore,  The study also highlighted the general lack of preparation for long-term care needs.

According to the study:

1. Only 50% of Americans surveyed have ever discussed (let alone planned for!) long-term care needs with their spouse.
2. Most individuals downplay their own risk of needing care. While 56% expect a parent to need long-term care, and 37% expect a spouse to need care, only 34% of those surveyed expect themselves to need long-term care.
3. Out of the 34% who think they will need long-term care, 72% plan to rely on Medicare or Medicaid to fund the cost.
4. Most of those who were surveyed pinned the cost of a private room in a nursing home at about HALF of its realistic cost.¹

Planning for long-term care needs is crucial. According to the Administration for Community Living, there is a 70% chance that individuals turning 65 years old today will need some form of long-term care. Furthermore, 20% of individuals turning 65 years old today are expected to need long-term care for more than 5 years.²

What are the options for funding a long-term care event? On a high level, there are only three options:

• Using insurance
• Relying on Medicaid
• Self-funding

1. Using Insurance

There are two types of insurance that can be used to pay for long-term care expenses: long-term care insurance and hybrid life insurance. Long-term care insurance typically qualifies for “partnership” with Medicaid because this policy usually has a cost-of-living adjustment. Assuming you needed long-term care and had a $300,000 partnership qualified long-term care insurance policy, this provision allows you to exclude $300,000 of assets from Medicaid’s consideration. This is especially useful because Medicaid will not be activated to pay for long-term care until you have virtually nothing left to pay for long-term care yourself (unless you had a partnership eligible long-term care insurance policy that let you save assets dollar-for-dollar from paying for your long-term care expenses yourself after the policy ran out of money). More on that later! The downside to a “pure” long-term care insurance policy is that it is a “use it or lose it” product. If you don’t need long-term care, you lose all the money that you paid to the insurance company over the years you had the policy. Not only do you lose the premiums paid, but you also incur the opportunity cost of missed returns in the market.

Alternatively, a hybrid life insurance policy is typically a permanent life insurance policy that has a rider which allows for an early withdrawal of the death benefit to pay for long-term care expenses. The benefit is this strategy is that you will receive value for the money you put into the policy regardless of whether you need long-term care (the funds will either pay for your long-term care needs or pass tax-free to the beneficiary of your choice). The downside to this strategy is that these policies usually are not “partnership” eligible with the State Medicaid program because they do not have a cost-of-living adjustment.

2. Relying on Medicaid

The second option is relying on Medicaid. For individuals who are not cared for by family members and do not have sufficient savings, this is usually the default method of funding long-term care. If no planning is completed beforehand, the Medicaid method can be catastrophic. Medicaid dictates that virtually all assets in your name must be spent down before they will pay for your care. This means that individuals who fund long-term care with Medicaid often pass away with hardly anything besides their house and personal possessions. In addition, Medicaid patients may not receive the same quality of care from the nursing home as “private pay”.

However, if correct planning is done ahead-of-time, assets can be set aside for the children and you and your spouse can be protected. In this case, Medicaid could be “part of the plan” all along. By planning beforehand, your legacy goals could remain intact while the government pays for your long-term care – a wonderful solution!

3. Self-funding

The last option for paying for long-term care is to self-fund. For individuals who are not cared for by family members and DO have sufficient savings, this is the default method. This method could work for individuals who have no heirs that they would like to provide an inheritance for. It’s simple, and the expenses could qualify for a medical expense above-the-line deduction on income taxes. You could ensure that you have sufficient quality of care, and you have the freedom to choose the facility you go to or the care you receive in home (Medicaid would not limit your options in this case).

Another “self-funding” strategy is to purchase life insurance instead of long-term care insurance and using your assets to pay for your care. This way, you are spending down your assets (often pre-tax) in a tax efficient way while reserving life insurance (the most tax efficient asset of all) to pass directly to your heirs as their inheritance. If you stay in care for longer than anticipated, Medicaid can kick in and cover you afterwards (so long as your insurance policy is properly structured and in existence for at least 5 years).

While all these options may seem overwhelming, Faithward Advisors is here to guide you to the right long-term care option for you. Reach out to your advisor today to begin the conversation!

¹ “Planning for Long-Term Care, New Findings from a 2023 Survey of Financial Professionals and Consumers,” Versta Research, August 2023. http://visit.lfg.com/MG-LTC-PPT003

² “How Much Care Will You Need?” Administration for Community Living, February 18^th, 2020. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need#:~:text=Someone%20turning%20age%2065%20today,for%20longer%20than%205%20years

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