Navigating the long-term care planning labyrinth

People walking on green bushes labyrinth, hedge maze.

No one wants to think that they or someone they love will need long-term care services, but with the population of older Americans set to rapidly expand it is a reality that is difficult to ignore. A recent episode of the television news program 60 Minutes followed the progression of an Alzheimer’s disease patient, Carol Daly, and her husband Mike. Carol’s progressive deterioration and the physical and emotional toll that the disease takes on her caregiver husband is heartbreaking and serves as a poignant reminder of the need to plan for a long-term care event.

Defining long-term care

Long-term care refers to non-medical care that is recommended by a physician and can be delivered by non-medical professionals. Care can be provided in the patient’s home or in an institutional setting such as an assisted living facility or nursing home. Unlike curative care that, as the name suggests, is focused on curing a patient, or rehabilitative care that helps patients maintain or improve functioning that has been impaired, long-term care- also known custodial care- helps patients that are unable to perform activities of daily living (ADLs), or that suffer from a severe cognitive impairment. These activities include bathing, getting dressed, eating, transferring and functional mobility, using the toilet and maintaining continence. To determine whether someone is capable of maintaining their independence, the list is often expanded to include instrumental activities of daily living (maintaining communication and meal preparation skills, driving or the ability to arrange transportation, shopping for food and clothing, housekeeping and maintaining personal finances).

Not everyone will require the same level of care as an Alzheimer’s patient, but the number of Americans that need help with two or more activities of daily living, or are living with a cognitive impairment, is expected to increase from approximately 6.3 million today to 15 million by 2050. And of the roughly 5.5 million American adults age 65 and over living with Alzheimer’s disease more than 60% are women.

Long-term care can be provided in a variety of settings, and, as in the case of Mrs. Daly, the most appropriate setting may change over time. In many instances, care can be provided at home during the early stages of a long-term care event. If the home is no longer a suitable environment, a variety of facilities ranging from adult day care to assisted living to a nursing home can be used to provide more frequent care.

The cost of a long-term care event will depend on the level of care provided and whether that care is provided at home or in a facility. Home care services currently average $47,934 per year nationally but rise modestly to $52,624 in Manhattan. Over time these costs are expected to increase as the demand for home health workers outstrips a dwindling supply of job applicants. At the opposite end of the spectrum, a semi-private nursing home room will set you back about $85,000 per year on average, but well over $200,000 if that room has a view of New York City.

Self-funding and public payment options

Understandably, paying for long-term care can be a source of angst and confusion, even for affluent families. While those with considerable wealth may opt to pay for care using personal assets, including savings, income-producing assets, and home equity, the amount of wealth required to accomplish this without imperiling important financial and estate planning goals can be difficult to quantify. In addition, confusion may set in when evaluating the extent to which various government programs will help pay for care. For example, Medicare will not pay for non-skilled custodial care but does provide coverage for up to 100 days of skilled nursing care delivered in a patient’s home or a skilled nursing facility if the treatment is considered medically necessary. To further confuse the issue, Medicare Part A (Hospital Insurance) will also pick up the cost of care provided in a long-term care hospital, which sounds a lot like a nursing home but isn’t. While nursing homes are tasked with providing custodial care, a long-term care hospital specializes in treating patients with serious medical conditions that may improve over time. These conditions, however, are often more acute in nature and likely to result in a longer stay than would normally be the case with care provided in a skilled nursing facility. If your head isn’t spinning yet, several states provide programs that are often limited in scope but can help pay for home and community based long-term care services for those that qualify, and the Veterans Administration Aid and Attendance program provides limited assistance for qualifying military veterans. To research programs in your area, the U.S. Department of Health and Human Services website is a good place to start.

Medicaid, the joint federal and state public assistance program for financing health care for those with low income is, however, far and away the largest source of long-term care financing. Eligibility is established by each state and based on income and personal financial resources. Ineligible individuals may engage in a process of transferring assets in order to meet Medicaid eligibility requirements but should be mindful that under the Deficit Reduction Act of 2005 (DRA) a “look-back period” of 60 months is imposed on assets transferred for less than fair market value. Medicaid benefits are also administered by the states, and each state is required to cover long-term care facility benefits, while coverage of home care benefits remains optional. Although many states do cover home care benefits, there has been a historical structural bias toward more expensive institutional care. A concerted effort has been underway to increase long-term care home-based services, including an increased use of waivers that allow states to waive federal requirements and provide home care services to those that would otherwise have received care in an institutional setting. Along with other reforms, increased use of home care services may help the Medicaid program better manage its costs.

For those with limited assets and income, or with very high medical expenses, Medicaid is generally the best option to pay for long-term care services. Retirees that receive Medicare and qualify for Medicaid are known as “dual eligible” and will likely have most of their medical and long-term care costs covered. It’s important, however, to understand what each program covers and how payments are coordinated. A little work up front helps to ensure that patients receive the care they need.

Insurance based payment options

Middle-class households, like the Daly’s, are at a heightened risk of rising medical and long-term care related costs and bankruptcy, including those resulting from end-of-life and/or custodial care. Too affluent to qualify for Medicaid, but without the financial resources needed to absorb the full cost of prolonged care, they may opt to mitigate their risk by using one or more insurance-based products, or by becoming a resident of a Continuing Care Retirement Community, which offers independent living units and access to a continuum of long-term care services. (Although the Continuing Care Retirement Community (CCRC) is not the focus of this article, they can be an excellent option for healthy older adults with sufficient financial means. A word of caution: CCRCs are currently regulated at the state level, although Congress has considered introducing greater federal oversight, and many states have little or no regulatory structure in place.)

First introduced in the 1980s, traditional long-term care insurance policies are designed specifically to pay for long-term care. Though much maligned of late due to the well-publicized and steep rate increases of several insurance carriers, these policies allow you to transfer a considerable amount of risk to an insurance company for a relatively modest premium. For example, a 58-year-old man in good health can purchase a policy that provides up to $350,000 in total coverage and includes a 3% compound inflation rider for about $2,300 per year. His healthy 57-year old wife can purchase a similar policy for an annual premium of roughly $4,000. The considerable difference in premiums is not a typo but a reflection of the underlying statistics: 46% of men turning age 65 will have a long-term care need during their lifetime, while the same is true for almost 60% of women. Women also face a much higher probability of needing more than one year of expensive nursing home care than do men, at 36% and 22%, respectively.

Qualified long-term care insurance policies will pay for care, up to the policy limits, if the person insured under the contract is unable to perform 2 of the 6 activities of daily living, or has a severe cognitive impairment such as Alzheimer’s dementia. Policy benefits can generally be used to pay for qualifying care received at home or in a facility, and insurance carriers offer additional riders that can provide applicants with considerable flexibility. Two such examples are the ability for couples to share each other’s benefit, or for their beneficiaries to recoup long-term care premiums if the benefits were never used. In addition, the federal government and many state governments offer tax incentives to help offset the cost of premiums, including the ability to deduct a portion of your tax-qualified long-term care premium as an itemized deduction on your federal income tax return, subject to AGI limitations, and state-level deductions or credits, including a 20% non-refundable credit for New York taxpayers,  that further induce residents to provide for their own care rather than relying on the government.

In recognition that the Medicaid program cannot continue to fund the long-term care costs of a veritable tsunami of baby boomers, the Deficit Reduction Act of 2005 (DRA) allowed states to offer approved partnership long-term care policies, whose benefits are disregarded for purposes of Medicaid eligibility. Four states: California, Connecticut, New York, and Indiana, had partnership plans that predate the DRA state plans and offer somewhat different-often more generous- benefits. Under a DRA qualified partnership plan, the amount of benefits paid under the policy will be disregarded for purposes of calculating eligibility for Medicaid. Most states now offer their own partnership plan and all DRA states plus Connecticut, Indiana and New York offer reciprocity of benefits, notably California does not. Reciprocity allows policy owners that change their state of residence to use qualified partnership benefits in any reciprocal state to pay for their care and to disregard those benefits when applying for Medicaid Extended Coverage in their state of residence. For example, a New Jersey partnership long-term care plan can be used to pay for care provided to a former New Jersey resident that has moved to Florida and meets that state’s residency requirements. Since Florida is a DRA state that offers reciprocity, the policy benefits will be disregarded for purposes of Extended Medicaid coverage in Florida.

Although traditional long-term care insurance offers a wide array of benefits and is tailored specifically to pay for long-term care, a combination of sharp premium increases and the uncertainty that care will be required have soured some on these plans. In response, the industry has introduced so-called hybrid policies, which combine a long-term care benefit with permanent life insurance (generally universal life, but in some cases whole life insurance) or an annuity. A typical hybrid life insurance and long-term care policy provide the certainty of stable premiums, a long-term care benefit that is much larger than the cumulative premiums, and the ability to withdraw funds from the policy if the insured person has a qualifying long-term care need. The qualifications are often similar to those under a traditional long-term care insurance plan but may differ slightly in some important respects. Thus, it’s extremely important to read the contract and understand the terms under which benefits are paid.

There are several differentiating factors between traditional long-term care insurance and hybrid plans. One critical difference is how plans are underwritten and funded. Traditional long-term care plans underwrite applicants for their risk of long-term care morbidity, or cognitive impairment, and generally charge an ongoing annual premium. In contrast, hybrid life insurance and long-term care plans must be underwritten for the mortality risk associated with life insurance as well as the morbidity risk tied to long-term care. As such, underwriting tends to be more stringent because of this increased scope. Life insurance based hybrid plans may charge an annual premium, but many products are funded with a one-time deposit that can easily reach six figures, leaving them out of reach for many applicants. For more affluent clients with large cash reserves, hybrid life insurance plans can be an effective way to reposition deposits held in low-yielding investments such as CDs. And with mortality remaining at an annoyingly stubborn 100%, the life insurance hybrid plans offer the certainty that the policy will eventually pay a benefit.

The final category of insurance-based long-term care products is the hybrid or linked-benefit annuity. Although it’s important to recognize that annuities come in many flavors, the basic premise behind the long-term care variety is that you purchase a deferred annuity- meaning that the contract has an accumulation phase and benefits are paid at a later date. The annuity includes a rider that provides a long-term care benefit that is a multiple of the initial amount invested. During the accumulation phase, the annuity grows tax-free, generally at a fixed rate of return, and if the annuity proceeds are eventually used to pay for qualified long-term care expenses any gain in the annuity is received free of income tax. The long-term care benefit is paid first from the annuity’s account value, followed by the long-term care pool. In the event that care is not needed, the contract’s beneficiary receives the annuity’s cash value- often the original deposit- and many contracts offer a return of premium feature that will allow the owner to cancel the policy and receive the contract’s cash value in return. You may not be surprised to hear that there is a tremendous amount of diversity in the products offered. For help sorting through the options, work with an independent insurance agent or financial planner with expertise in this area.

Long-term care insurance, whether a traditional or hybrid plan, is really asset insurance. Those that have saved diligently for retirement and accumulated a sizable nest egg, face the very real prospect that much of their good work could be undone by a prolonged long-term care event. Insurance based solutions can help mitigate this exposure by transferring some of this risk to an insurance company. The target market for these plans is broad and includes those too affluent to qualify for Medicaid but without enough resources to self-insure, as well as very affluent individuals that recognize the likelihood that long-term services will be needed and see the benefits of using a dedicated insurance solution to pay for care.

As the Daly’s case so clearly illustrates, the process of planning should begin well before care is needed. Decisions surrounding health care, including custodial and end-of-life care should consider specific risk factors that may impact your need for care, along with the cost of care, the impact that a large or prolonged health care event could have on your finances, and the payment sources available to pay for your care.

Identifying and planning for your health care needs, and communicating your wishes to loved through your estate plan and medical directives can provide you with peace of mind, and may relieve others of the burden of making difficult choices on your behalf. The lessons conveyed by good planning may be the best legacy you can leave.

Sincerely,

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John Male CFP®, RICP® (with thanks to Eissah Aminzada for his assistance)

The Gassman Financial Group

G&G Planning Concepts, Inc.

9 East 40th Street, 5th Floor

New York, NY 10016

T: (212) 221-7067

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