Options for Funding Long-Term Care Expenses

retired personMy Comments: When you reach retirement age, the elephant in the room becomes Long Term Care. This is when someone in the household becomes unable to perform two of what are called Actitivies of Daily Living, or ADLs.

A healthy spouse will simply take on more and more to help the affected person manage and get by from day to day. But it takes a huge toll, and if there are enough resources or insurance in place, there may be money to find someone to help.

Only two of the four ways to finance a solution are referenced in this blog post. If you want more information on the other two, call or email me.

This begins to explore ways to pay for those LTC expenses.

January 12, 2016 by Wade Pfau

Four general ways to finance long-term care expenses include:
1. Self funding with personal assets
2. Medicaid
3. Traditional long-term care insurance
4. Long-term care insurance combined with life insurance or annuity

I will discuss the first two of these today and go into the others in subsequent posts.

The overall cost of long-term care can be defined as:

LTC Cost = LTC Expenses + LTC Insurance Premiums – LTC Insurance Benefits

This equation highlights that the overall cost of funding long-term care is comprised of the actual expenses for care plus any premiums paid for long-term care insurance, less any benefits received (including death benefits or other auxiliary benefits, when applicable) from the insurance policies. For this formula, one may consider Medicaid benefits as a type of insurance benefit.

Before we go any further, notice that Medicare and health insurance are not on the above list. The misperception that Medicare provides long-term care support is common. Medicare provides support only in limited situations when an individual is confined to home, requires intermittent or part-time support from a Medicare-certified home health agency as prescribed by a doctor, and is expecting a full recovery. Full benefits last 20 days and partial support ends after 100 days.

Selecting between the four options listed above includes a number of considerations: age, health, ability to receive help from family or friends without overburdening them, wealth levels and how they may relate to Medicaid qualifications, legacy objectives, risk tolerance with regard to the financial impact of unknown long-term care events, and costs and benefits of different types of insurance.

As far as funding is concerned, developing a written plan and sharing it with family members can help avoid misunderstanding when the time comes. You should also ensure family members know about any funds set aside or any insurance policies designed to support care when the time comes. A qualified elder care law attorney can help with issues surrounding the transition to using Medicaid for long-term care expenses.

Self Funding
Self funding means any long-term care expenses will be funded through distributions from financial assets. This strategy keeps the full risk for the amount of long-term care spending on the household and results in the widest range of potential spending outcomes. Of course, if no long-term care event occurs, the cost of self funding is zero dollars. But without any risk-sharing, the threat of potential costs that could exceed one million dollars hangs overhead.

If you are more risk-averse, you may prefer to pay a premium to better protect your wealth in the event of an expensive long-term care event, even if it carries a relatively small loss should no long-term care event arise. Risks of self funding include potential high costs, investment risks for the underlying portfolio, and difficulties with managing investment assets after a long-term care need begins.

For self funding, ask yourself if you have sufficient financial resources to cover an expensive long-term care shock and still meet the remaining financial goals for retirement. Which specific resources could be used for long-term care expenses? How will they be invested? What impact would these expenditures have on the standard of living for remaining household members and potential beneficiaries? Is this a risk that can be accepted, or could insurance provide a positive impact by helping pool this risk?

Clearly, the self funding option is only possible for those with sufficient discretionary assets to meet potential expenses. With sufficient assets, those with high risk tolerance may prefer the increasing variability in net care expenses by self funding to insurance. Others with a lower risk tolerance might choose to pool some of the risks through an insurance company.

Another risk tolerance consideration: What kind of investment returns could the assets earn if no protection is purchased? The more conservatively these assets earmarked for long-term care are invested, the less potential upside growth they would lose. Those with greater risk tolerance who invest more aggressively may find self funding fits their circumstances, while those who would otherwise invest the assets more conservatively – in cash or CDs, perhaps – may benefit more from an insurance solution.

The self-funding route may also be more attractive to individuals with a family history free of health problems that result in the need for long-term care such as dementia. Also, those with the potential to receive care from family or friends may feel self funding is a safe bet as it could greatly reduce the cost of care.

Self funding could force an individual to rely more greatly on family care, which introduces a number of potential opportunity costs not included in formal cost calculations. Caregivers often experience increased stress and health problems, and they could be forced to make sacrifices in their careers that could result in substantially reduced lifetime earnings. The health problems created by providing long-term care could potentially result in the caregiver needing long-term care for themselves as well.

Medicaid
Medicaid is the most commonly used funding option for long-term care in the United States. It generally serves as a last-resort option once assets and income have fallen to sufficiently low levels. The qualifications for Medicaid – assets, income, and medical need – vary widely by state, which makes it hard to generalize about the process. Some states require relative impoverishment to qualify for Medicaid, while others allow money set aside for a surviving spouse to be exempted from consideration to pay for long-term care.

Medicaid is the main option for those entering retirement with little savings. It is also the go-to for continuing care after available resources have been depleted.

Still others reposition their assets with the aid of an attorney to work around Medicaid limitations and gain access – a somewhat controversial strategic process known as “Medicaid planning.” Some view it as unethical, while others say they are entitled to the welfare benefits through their lifetime tax payments.

Either way, Medicaid is making such planning increasingly difficult by limiting the transfer of assets to avoid using them to pay for long-term care. Also, efforts to recover Medicaid benefits from the estates of beneficiaries have grown more and more complex as states work harder to reduce overall Medicaid expenditures.

Nevertheless, Medicaid planning may be helpful for those with limited resources and health problems preventing them from qualifying for long-term care insurance. Available resources may still need to be spent on long-term care needs in the end, and qualification for Medicaid could occur if long-term care needs persist.

Because Medicaid reimbursement to long-term care facilities is generally lower than the true cost, self-funding patients may receive priority admission – and potentially better quality care – over Medicaid patients. Yet, as an increasing number of people require long-term care, making it difficult for everyone to receive high quality long-term care, those who would otherwise have the ability to self-fund may come to regret using Medicaid planning techniques if they could have funded better quality care themselves.

Wade Pfau: Professor at The American College and Principal at McLean Asset Management. His website: http://www.RetirementResearcher.com

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