One of the most important topics your retirement financial advisor should cover with you is your risk for needing long-term care in retirement. A common misconception among pre-retirees is that Medicare will cover nursing home care or being placed in a long-term care facility. But it doesn’t. Medicaid does—after you qualify.
What Is Long-Term-Care Risk?
We define the risk of long-term care as the potential risk that one spouse could bankrupt the other if they become seriously incapacitated. Usually, the risk is greatest with married couples, because single people can just spend down all the assets they have, and when those run out, they can go on Medicaid.
However, with or without a spouse, you must also consider your heirs. Way too many adult children have been forced to bankrupt their parents’ estate in order for their parents to qualify for Medicaid–essentially wiping out their own inheritance.
What Is the Cost for Long-Term Care?
Spending down all the family assets and bankrupting your estate so a family member can qualify for Medicaid is devastating. Watching it slowly become necessary is also very difficult.
The first stage of long-term care is often covered by a spouse or adult child (most often, the wife or oldest daughter) who put aside extraordinary amounts of time to care for their family member in his or her home until it becomes too much for them to handle.
At that point, the financial costs begin as they have to hire in-home care workers to help out. This gets progressively more expensive as their family member’s debilitation increases and more care is required. Finally, the spouse or family member realizes they are going to have to put their loved one into a long-term-care nursing facility or pay for full-time, round-the-clock, in-home care.
Full-time care costs somewhere around $10,000 per month in most states, in today’s dollars. A lot of studies have been done, estimating that the average nursing facility stay is around 18-24 months. That means the cost can be upwards of $240,000. That’s why it’s important to go through the retirement planning process.
Options to Cover Long-Term Care (LTC) Expenses.
Your retirement financial advisor should have many options to present to you in terms of hedging your financial risk of needing long-term care in retirement. They should be able to explain the benefits as well as any downsides to each option so that you can make the best choices for your situation.
Here are some of the options we review with our clients along with key considerations:
Self-insuring means having enough money set aside for LTC expenses. This could be equity in your home or money in your investments that you can use to cover any long-term care costs which might arise. It means having money designated and available for that purpose right in your retirement plan.
- Traditional long-term-care insurance.
Standard LTC policies are notoriously difficult to collect on, with the burden of proof of incapacity incumbent upon the already-stressed family member. And remember that the only way you will actually get any value from all the money you paid for premiums is only if you actually enter into a long-term-care facility. If you die or if that never happens, all that money has gone toward nothing.
The cost is somewhere around $400-500 per month per person for around $300,000+ worth of long-term-care coverage. Be careful, because many times LTC policies sold as “guaranteed-level premium” surprise policyholders as they approach age 70 with a premium increase of as much as 60%. In almost every case, your premiums are going to go up or your benefit go down at the point in life when you may actually need the insurance, depending on your policy options. Many insurance companies are actually hoping you drop or cancel your policy as you get older so that the risk of the insurance companies’ having to pay out any benefits goes to zero.
- Whole life insurance with a long-term-care rider.
These policies often do make sense. If you develop the need for long-term care your costs will be covered, but otherwise, if you don’t become incapacitated, that money will go to your beneficiaries at your death. Sounds great, but the trouble is the cost. These permanent policies cost around $1,000 per month per person—for the rest of your life.
- Asset-based long-term care.
This option allows you to have an account with an insurance company which you put money into in order to save for long-term care. The money is liquid, and if you change your mind, you can pull the money out. Asset-based long-term care policies are designed so that when you die, your beneficiary/ies get 2x what you’ve put away into your policy, but if you go into a long-term-care facility, you will get 3x or 4x the benefit.
Keep in mind that it is usually difficult and expensive for people to put the amount of money they may actually need away like this. You may have to put away $10,000 per year for both husband and wife—that’s $20,000 per year for at least ten years—to have hedged your actual LTC risk.
- Safe harbor trusts.
Safe harbor trusts allow you to shelter your assets by putting them all in another family member’s name so that your spouse can qualify for Medicaid. The plan is that your trustee will return the assets to you–the healthy person–after the incapacitated person is in a Medicaid-approved facility. The trouble is that your designated trustee may change his or her mind about returning your money, and legally, you can’t do anything about it.
Be doubly careful, because even if your trustee is trustworthy, the IRS has implemented a “five-year-lookback” so that they can “claw-back” the assets placed in a safe harbor trust if a medical diagnosis has been made within the five-year period of when it’s been established.
Tragically, this option has become very popular. For financial survival, couples can divorce to preserve any remaining assets so the healthy one can live out their life while the incapacitated husband or wife qualifies for Medicaid.