How to plan for LTC?
Long-term care refers to a range of services and support to meet your needs when you are unable to perform certain activities of daily living or ADLs on your own. The six traditionally recognized ADLs are bathing, continence, dressing, eating, toileting and transferring. Most long-term care definitions also include cognitive impairment, even if 2 of the other 6 are not fully impaired. Planning for long-term care expenses is an important part of financial planning and one that can be overlooked. In 2000, nearly 10 million people needed long-term care. The average period for that long term care need was 1,040 days and the average cost per month ranges from $4,000 to $10,000. This number is specifically for assisted care or custodial needs and does not include the increase in out-of-pocket medical costs that can often accompany a long-term care need.
can often accompany a long-term care need. Long-term care needs are general addressed through self-financial (having enough liquid assets to pay the costs), some form of insurance or a combination of Medicare and Medicaid for those who have little to no assets or income. Long-term care insurance of all varieties is designed to provide you with a way to plan for future expenses while you can afford to. Long term care insurance is an insurance product which pays for long term care services in many settings, such as at home, a nursing home, assisted living facility or adult day care facility. Long-term care insurance is a planning tool to ensure your assets remain intact if you do require long term care. Three categories of long term care insurance are traditional, asset-based, and linked-benefit LTC annuities.
Traditional LTC policy benefits offer reimbursement of qualified care expenses and are usually calculated with a daily maximum for a set number of days (ex. $310 per day for 3 years). Some people buy coverage to ensure they receive quality treatment in their home before entering a facility, while others buy coverage to ensure they leave a legacy to heirs that won’t be reduced by the cost of care in their later years. The benefit may or may not increase over time to protect against inflation. Such increases are valuable and may be necessary to afford the increasing cost of care over time. . Traditional LTC is the cheapest of all LTC types because if the insured never triggers a benefit, the premiums are retained by the carrier (much like Term life insurance). However, premiums are not guaranteed to remain level and consumers have been subject to substantial rate increases since these products went in place.
Asset based long-term care (LTC), also called linked benefit LTC refers to a life insurance policy that offers tax-free LTC (living) benefits in addition to, or in place of a death benefit. This is not traditional LTC but rather an alternative to self-insuring because benefits are paid from an asset (death benefit) that would otherwise go to heirs upon passing. Most buyers appreciate that in the event where the insured never needs custodial care; their heirs will receive the policy death benefit. Premiums for asset-based LTC are higher than traditional LTC because a death benefit is going to be paid even if LTC is never triggered. Premiums can be paid monthly, annually or in a single lump sum.
One way to use linked-benefit LTC is to link it to an annuity. Some annuities offer long-term care (LTC) via rider1 with benefits amounts that can be substantially larger than the annuity deposit or annuity current account value. This is not traditional LTC but rather an alternative to self-insuring because benefits are paid from an asset (death benefit) that would otherwise go to heirs upon passing. This annuity can also be used as a premium source for exchange into a traditional LTC policy. Only a limited number of annuity providers offer this type of benefit and carriers may have different requirements or calculations for each rider or annuity product. Most charge a fee that is often deducted from the internal policy value annually. The products that offer more substantial LTC benefits often charge a larger internal fee. The rider fee is often less than traditional LTC because the rider does not pay until the annuity value has been fully depleted. Therefore, an annuity LTC option can help self-insure and reduce overall premium for LTC by first spending down one’s own resources, then tapping into insurance afterward.
While it can be cumbersome to determine which policy is right for you, don’t go at it alone and follow three guidelines; what is the financial rating of the carrier, does the carrier have a history of filing rate increases with the state, and what inflation protection options are offered?
Estate planning goes hand in hand with choosing which type of long-term care policy is right for you. Medicare is generally available for people over age 65 and disabled. It only pays limited amounts for skilled care following a hospital stay and it is not intended to cover care that assists people with ADLs. For those with minimal assets and income, Medicaid may be an option. Be aware that when applying for Medicaid, most of your assets are taken into consideration-even the equity in your home. Consulting with an estate professional before a long-term care event takes place will help set up your finances to typically be friendlier to receiving some sort of Medicaid benefit.
Medicaid is also not an idea solution for many as it also limits the facilities and care that you can receive. Your care facility and/or care personnel will need to be eligible and willing to receive payments via Medicaid which is not true for many facilities and personnel.
If a long-term care event happens to you or a family member before working long-term care costs into your financial plan, have a plan for how to draw down your assets. Weigh the pros and cons of tapping into an IRA verses individual account. Work with your financial advisor to create and implement a solution and then communicate this plan with family members and confidantes. Likewise, having a power of attorney for healthcare and financial decisions will help this plan follow through.
Planning for long-term care costs is just as important as planning for taking income in retirement. Navigating through long-term care options shouldn’t be a deterrent as there are many professionals who specialize in this area of financial planning.
1Riders are optional, come at an additional cost and are often subject to specific restrictions and limitations.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Trilogy Capital, Inc., a Registered Investment Adviser. Trilogy Financial Services, Trilogy Capital, Inc. and NPC are separate and unrelated companies.