For most, it is difficult to think about the possibility of needing long-term care. But many will need it, and that is where advisors can lend help and hope. Start the discussion and prepare clients now so they do not face a financial crisis later. Long-term care planning—if not now, when? How do I plan for it? Can I afford it? The good news is that planning and products have evolved. Let’s dig into what can be done today to help ease the worry and challenges posed by growing older.
Some additional hurdles include:
- Underestimating the cost of care
- Knowing the cost and not comprehending how to pay for care
- Mistakenly assuming Medicare and health insurance will cover LTC needs
- Traditional long-term care insurance has had a bad rap, due in part to significant premium hikes on early polices that were initially mispriced and delivered inconsistent benefits
- Some find it problematic to pay a great deal of money for something they may never use
Self-funded long-term care
Perhaps an individual cannot qualify for traditional long-term care insurance (LTCI) due to existing health issues. In this situation, they will have to use savings or investments to pay for care out of pocket and should set money aside for two to three years of LTC. Planning early is key to success. The best advice may be to live under one’s means and save more. The downside to this approach is not knowing how many years of care may be needed. Alzheimer’s has an average life expectancy after diagnosis of eight to ten years, according to the Alzheimer’s Research and Prevention Foundation. The funds to cover five years in a facility may be available but would deplete all assets in year six with nothing left for beneficiaries.
Medicare vs. Medicaid
Several strategies are at your disposal to help cover costs associated with LTC. But not Medicare. Most people believe their LTC needs will be covered by Medicare. Medicare will pay for short stays in skilled nursing facilities that provide rehab or therapy services after a hospital stay. However, Medicare does not cover long-term care.
In contrast, Medicaid covers long-term care costs at home or in a skilled nursing facility. In fact, Medicaid is the primary payer for long-term care services. The biggest issue is that many people who need long-term care never qualify for Medicaid assistance. Here’s why:
- Income thresholds. Individuals must have limited income and assets to qualify. If one is above those thresholds, current assets must be “spent down” before utilizing Medicaid.
- Lookback period. There is a lookback period when assessing eligibility. In most cases, a review of financial records, going back five years, will seek to uncover whether assets were sold or given away to meet your state’s asset limit.
- Medicaid pending. Even if an individual qualifies, there might be a period called “Medicaid pending” where benefits have been denied or the recipient not approved. This can be quite stressful, especially if immediate care is needed. Not all facilities will accept a person who is in pending status.
- Bed availability. Additionally, a bed may not be available at a preferred facility.
Mine your health savings accounts
A health savings account (HAS) is a hidden jewel in your LTC and retirement planning arsenal. The approach is simple, effective and tax-advantaged. Contributions to an HSA reduce annual taxable income and grow tax deferred until monies are used to cover eligible health care expenses.
HSA withdrawals for medical expenses and LTCI are tax-free when they meet certain guidelines. Based on age, one can use HSA monies tax-free to pay LTCI premiums. To make this work, the long-term care policy must only cover long-term care services. Most LTCI policies qualify.
After age 65 the money can be used for absolutely anything without penalty (although ordinary income taxes will be due on withdrawals). While there are annual contribution limits, there is no maximum accumulation limit for an HSA. For example, 2022 Annual Contribution Limits are: $3,650 self only, $7,300 family contribution limit plus a $1,000 catch-up provision for those 55+.
Start small. An initial conversation to get the ball rolling can go a long way. Next, integrate the discussion with the financial planning process, just as one would tackle saving for retirement or income in retirement. The risks and costs of long-term care are among the most important considerations—fortunately, there are an array of solid tactics and solutions available. Given the enormous potential impact on assets, we can all benefit from the dialogue.
Adapted from LifeHappens LTC & LifeHappens Careful Planning & LifeHappens LTC Options