Planning for Long Term Care
An important part of planning for long-term care is deciding how to pay for services. This is because long-term care is very expensive, and contrary to what many people believe, their Medicare coverage will not pay for most of the long-term care services they need. While some people may qualify for Medicaid – the major payer of long-term care services, most people won't. There are other federal public programs, such as the Older American's Act, or state funded programs, that pay some long-term care services, but like Medicaid they target those people with the most functional and financial need. Consequently, if you are one of the 60% of people over the age of 65 who will need long-term care services – there's a very good chance you will have to pay for some or all of your long-term care services out of your personal income and resources.
Paying for long-term care out of your personal income and resources can be challenging. Even if you have a modest need for assistance at home with personal care, say a visit from a home health aide 3 times a week, based on 2006 average costs, you would have to pay about $16,000 a year for those services.
To make the best decisions about how to pay for long-term care you need to understand what services cost, what public programs you are eligible for and what they cover, what private financing options are available, and which ones work best for you
Evaluating Your Options
It's difficult to predict if or how much care you will need, whether you will have family or friends who can provide some or all of your care, and how much care may cost you. However, it's reasonably easy to predict that if you need extensive long-term care services or need services over a long period of time, you will have to pay for some or all of it out of your personal finances. That's why an increasing number of people are using private financing options to help them pay for long-term care if and when they need it.
Private long-term care financing options include long-term care insurance, trusts, annuities, and reverse mortgages. Which option is best for you depends on many factors including your age, your health status, your risk of needing long-term care, and your personal financial situation. The following charts summarize how age and health status may affect your eligibility for and choice of private financing options.
Health Screening May Be Required
Some methods of paying for long-term care require you to undergo health screening. Some options require that you be in relatively good health (not currently needing long-term care and not having a debilitating chronic condition such as Parkinson's disease that would almost certainly mean you would need long-term care eventually.) In contrast, some options are only available to you if you are in poor health.
The table below shows whether your current health is a consideration in eligibility for each option listed.
| Relatively Good Health | Poor Health or Terminally Ill | Health Considerations are Not Important |
|---|---|---|
| Long-term Care Insurance | Accelerated Death Benefits | Annuities |
| Continuing Care Retirement Communities |
Viatical Settlements | Using home equity to fund long-term care services |
| Trusts | ||
| Life Settlement |
Age Requirements
Some private payment options are good choices for older people; others make more sense for a younger person.
| Better Option for Younger Person | Better Option for Older Person |
|---|---|
| Long-Term Care Insurance | Deferred Annuities |
| Self-Pay (Save on your own.) | Sell Home |
| Home Equity Conversion | |
| Charitable Remainder Trust | |
| Life Settlement | |
| Continuing Care Retirement Community |
What Is a Long-Term Care Annuity?
An annuity is a series of regular payments over a specified and defined period of time. The funds for the annuity come from a single premium payment that the individual makes at the outset. Two types are available:
- Immediate long-term care annuity
- Deferred long-term care annuity
What Is an Immediate Long-Term Care Annuity?
For a single premium payment you make to an insurance company, you receive a specified monthly income. It is available to you without regard to your health, so if don't 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 single premium payment is converted to a monthly income stream that is guaranteed either for a specified period of time or for the life of the individual receiving the payments. The payout schedule varies based on the amount of the initial premium, your age, and gender. Generally, because of their longer life expectancy, females receive a smaller monthly payment over a longer period of time than do males of the same age.
Important Considerations:
- The annuity amount you receive may not be enough to pay for your long-term care expenses.
- Inflation may make the monthly income you receive from the annuity less than what you need.
- The tax implications of an annuity are complicated. Consult with your tax professional before
purchasing one.
What Is a Deferred Long-Term Care Annuity?
This type of annuity is available to individuals up to age 85. Similar to other annuities, for a single premium payment, you receive a stream of monthly
income. The amount you receive depends upon your health. The annuity creates two funds: one for long-term care expenses and another separate cash fund to be used however you desire. The "long-term care" fund can be accessed immediately, while access to the "cash" portion is deferred and more limited over time. 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 this type of annuity, there are seven broad health criteria. However, most people will qualify even if they do not qualify for long-term care insurance.
Important Considerations:
- If the long-term care fund is not used, it can be passed to your heirs.
- The annuity may not be enough to pay for your long-term care expenses.
- Inflation may make the monthly income you receive from the annuity less than what you need.
- The long-term care portion of the annuity does not satisfy the requirements for a tax-qualified long-term care policy, so there is a risk of being taxed on the money from the fund that is used for your long-term care expenses.
- The tax implications of an annuity are complicated. Consult with your tax professional before
purchasing one.
Can I Save on My Own for Long Term Care?
Most people don't realize how difficult it is to save enough money to pay for long-term care. Use the long-term care savings calculator to see how much money you would have to save on your own to accumulate enough money to pay for long-term care under a variety of scenarios. Choose the one that's most appropriate for your personal situation.
What Is a Trust?
A trust is when a person (the trustor) transfers something of value (the asset) to another person (the trustee). Once that takes place, the trustee manages and controls the asset for the benefit of the trustor or for a named beneficiary.
One use of a trust is to provide flexible control of assets for the benefit of minor children. Another is to provide flexible control of assets for the benefit of an elderly or disabled person, including yourself or your spouse.
What Types of Trusts Can Help Pay for Long-Term Care?
- Charitable Remainder Trusts
- Medicaid Disability Trusts
What Is a Charitable Remainder Trust?
These trusts allow you to use your own assets for long-term care with the added benefit of reducing taxes. This type of trust is typically used by wealthy people with specific types of assets that they donate to a public charity at fair market value. The individual making the donation receives a tax deduction on the amount that has been gifted. The donor then receives payments from the trust that can be used to pay for long-term care. Once the donor dies, the balance of the funds in the trust go to the charity.
Important Considerations:
- The funds available to you are 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 have donated a substantial
amount of money to the charity.
- A Charitable Trust may not provide enough income to pay your long-term care expenses.
- The donation may affect your Medicaid eligibility.
What Is a Medicaid Disability Trust?
The purpose of a Medicaid Disability Trust is to enhance the quality of life of an individual with a disability who also qualifies for public benefits. Medicaid Disability Trusts are limited to disabled persons under age 65. With this type of trust, assets are managed by a non-profit organization. The trust may be established by a parent, grandparent or legal guardian for the benefit of the disabled person. This is the only kind of trust that is exempt from rules regarding trusts and Medicaid eligibility.
Important Considerations:
- If Medicaid benefits are paid on be half of the individual, any amount remaining in the trust at the individual's death can be recovered by the state.
- There are complex tax implications. Consult your tax professional when considering establishing a Medicaid Disability Trust.